Brazil Stocks Trim Losses After Flirting With Bear Market
Brazil Stocks Set for Bear Market as Fiscal Woes Deepen Slump
(Bloomberg) -- Brazilian stocks pared losses after nearing a bear market, but still posted their worst week since the early days of the pandemic amid concern over the country’s fiscal outlook and growing bets on higher interest rates.
The Ibovespa closed 1.3% lower, after falling as much as 4.5% earlier Friday. The stock gauge moved off the day’s lows after Economy Minister Paulo Guedes vowed to stay on his post and defended the government’s push to increase social aid to the poorest. Still, the benchmark stock index led global losses this week, its worst since March 2020, and has fallen 19% from a June peak.
Local assets have tumbled in recent days as President Jair Bolsonaro’s administration seeks ways to boost spending ahead of next year’s election and bypass fiscal rules meant to keep budgets in check. Bolsonaro has recently pledged to offer aid to truck drivers and is seeking to change how the spending cap is calculated.
“Brazil’s fiscal deficit has been an ongoing focus of concern for macro investors,” Caesar Maasry, a New York-based emerging-market strategist at Goldman Sachs Group Inc., wrote in a note Oct. 21. “The breaking of spending limits may be a significant break from historical precedent that drives further idiosyncratic risk aversion.”
The threat of increased government spending has traders piling into bets that Brazil’s central bank will embark on more aggressive rate hikes to keep a lid on inflation. Guedes said at a press conference that the monetary authority can’t fall behind the curve. Analysts from JPMorgan to Barclays now see policy makers raising rates by at least 125 basis points, while some money managers say even a 200 basis-point increase shouldn’t be ruled out at next week’s meeting.
While higher rates boost the carry trade appeal and may provide some short-term support to the currency, they may further slow the rotation to equities from fixed-income products.
BRAZIL REACT: Bolsonaro, Guedes Double Down on Populism
Higher rates, a worse outlook for the economy and greater volatility stemming from the 2022 election race should challenge the outlook for Brazilian stocks over the next 12 months, according to Itau BBA strategists.
Earlier today, hedge fund manager Legacy said its flagship fund’s main allocation in local assets is a combined position of being short on the U.S. dollar against the real while also betting on declines in the Ibovespa.
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