Negotiations between the European Union and Mercosur in Brussels have advanced, and trade ministers from both blocs will start debating more sensitive market access issues on Wednesday. After many years of often fraught negotiations, the National Confederation of Industry expects some agreement to be reached by next Friday. Negotiators in Brussels are also optimistic, albeit moderately, as last-minute surprises can always occur. Mercosur sources say there is a preliminary agreement to grant Mercosur up to 15 years of tariff reductions in a range of products that includes machines, cars and auto parts. The EU would pay zero tariffs in up to seven years, but there’s still no consensus on the timeline. Mercosur also is not expected to allow exports of remanufactured products, sources say.


Source: Valor Econômico

The secondary offering of Petrobras shares held by Caixa Econômica Federal was priced at R$30.25 per common stock, as first reported by Valor. There was a discount in relation to Tuesday’s closing price, of R$ 30.70, but it sold higher compared to its initial level of R$29.85. The state-owned bank sold 241,34 million common shares, raising R$7.3 billion. The proceeds will be used to pay off Treasury loans. Retail investors’ demand was high as well as that of institutional investors, according to two sources.


Source: Valor Econômico

Brazil’s industrial production increased in April from the previous month as its factories produced more durable goods for consumers.

Output rose 0.3% in the month and declined 3.9% from a year earlier, the Brazilian Institute of Geography and Statistics, or IBGE, said Tuesday. In March, industrial production declined a revised 1.4% in the month and fell a revised 6.2% from a year earlier. Durable goods production increased 3.4% in the month and production of capital equipment grew 2.9%, the IBGE said.

The small increase in production is partly due to the rise in employment Brazil experienced in the three months through April, according to Pedro Coelho Afonso, chief economist of Sao Paulo-based PCA Capital. Industrial production is nevertheless likely to remain weak in coming months, as companies and investors hold back from spending while they await the outcome of the government’s efforts to overhaul Brazil’s insolvent pension system, he said.

The administration of President Jair Bolsonaro presented its pension proposal to Congress in February and it’s still being debated at committee level in the lower house. The government faces resistance among left-wing lawmakers and government employees who oppose cuts to retirement benefits, and the process is taking longer than analysts expected at the start of the year.

“Until we know for sure what’s happening with the reforms, and it’s getting harder to say, things will be hard to predict,” said Mr. Afonso. “Its really hard to make long- or even medium-term forecasts because of that.”

Output of consumer goods rose 3.1% in the month and production of semi-durable goods increased 2.6%, IBGE said. The biggest negative impact on output, of 9.7%, came from mining and other extractive sectors, as the repercussions of the deadly mining disaster in Brumadinho in January continue to be felt.

That accident killed more than 200 people when a tailings mine collapsed and sent a wave of mining waste sweeping over nearby offices of iron-ore producer Vale SA (VALE, VALE3.BR). The company halted production at several mines near dams similar to the one that collapsed, and authorities ordered the closing of more dams over concerns for their stability.

Vale said the closed operations will cut its iron ore production for this year to close to 300 million metric tons, from its forecast at the start of the year of output of about 400 million tons.


Brazilian banks are chalking up “excessive” profits, Economy Minister Paulo Guedes said on Tuesday, adding that the country needs an injection of competition to end what he called the cartels that dominate many of its major sectors.

In testimony to the lower house Finance and Taxation Committee, Guedes said sectors such as banking, oil and postal services reflected a lack of competition that is holding Brazil back and preventing growth from picking up.

Banks did well in the first quarter of the year, lawmakers put to Guedes, even though the economy contracted for the first time since 2016, putting Brazil half way back to recession.

“Banks’ profits are huge, they are really excessive,” Guedes said, noting that Brazil’s handful of big banks, one major oil producer, two main refineries and a distributor points to a ‘cartelized’ economy.

“We need competition, competition is good,” he said, adding that the central bank has made it a priority to help open up the economy, particularly the financial sector.

According to Brazil’s central bank, citing Bank for International Settlement figures, the top five Brazilian banks hold 82% of total banking assets. That’s a higher level of concentration than all other major emerging countries such as India, China, South Korea, Mexico and Singapore.

Guedes repeated that he wants to accelerate the privatization process, echoing his comments earlier this year that if he had his way he would sell “everything”, but noted that President Jair Bolsonaro doesn’t quite share his privatization instincts.

Still, the president is coming round to his way of thinking, Guedes told lawmakers.

He once again struck an optimistic and bullish note on the impact of pension reform on the economy, arguing that approval of a strong package would put Brazil back on the path to growth “immediately”.

Many economists doubt this, and have slashed growth forecasts for this year and cut them for next, even while maintaining expectations that a meaningful pension reform bill will be approved.

The government’s bill aims to save the public purse 1.237 trillion reais ($321 billion) over the next decade through a mix of raising the minimum retirement age, increasing workers’ contributions and other changes to the social security system.


Source: Reuters

Brazil’s annual rate of inflation likely eased in May, according to a Reuters poll of economists, falling for the first time this year in a sign that it may have peaked, while remaining well above the central bank’s target.

The median estimate from 15 economists was for consumer price inflation to fall to 4.72% in the 12 months through May from 4.90% in April, driven by weaker food and fuel prices.

The monthly rise is seen slowing to 0.20% from 0.57% in April, according to the poll, a rate that would be the lowest this year.

“We anticipate food deflation to have gained momentum in the second half of May, which underpins our expectation for (monthly) inflation to have moderated to 0.21% in May,” said Barclays economists in a note to clients. “If our forecast is correct, annual inflation should decelerate to 4.7%.”

Central bank policymakers will be hoping the forecasts are right. April’s annual inflation of 4.9% was the highest in more than two years, above the central bank’s year-end target of 4.25% and brought a break above the 5.0% threshold closer into view.

Policymakers earlier this year said inflation would peak around April or May before returning to target. But minutes of their May 7-8 meeting showed they had softened that view slightly, and now see inflation peaking “in the short term.”

In broad terms, Brazil’s economy is generating few inflationary pressures. Activity contracted in the first quarter for the first time since 2016 and the indications are the current quarter is not much better. Recession risks are rising.

In addition, unemployment remains high, at 12.5%, with more than 13 million Brazilians out of work and a huge degree of spare productive capacity across the economy.

On the other hand, Brazil’s currency weakened to 4.12 per dollar BRBY in May, the worst in eight months, pushing up import prices and input costs. That has put the squeeze on companies weighing whether to pass higher prices along to consumers.

IHS Markit said this week that exchange rate pressures kept input price inflation at “elevated” levels in May, but companies raised their prices only “marginally” in comparison.

“Across the private sector, charge (price) inflation eased to a three-month low,” it said.


Source: Reuters

Brazil’s government is looking at assembling a fiscal stimulus package worth around 20 billion reais ($5 billion) to revive flagging growth and prevent the economy from falling back into recession, sources told Reuters.

Stung by figures on Thursday that showed the economy shrank in the three months to March for the first time since 2016, the Economy Ministry may soon free up cash from workers’ guarantee funds, the sources said on condition of anonymity.

The FGTS funds, from employers’ contributions, serve as a buffer for employees, and can only be drawn from in certain circumstances such as buying a home, loss of employment or serious health problems.

Economy Minister Paulo Guedes said on Thursday that the government is looking at freeing up active and inactive FGTS accounts, but only after fiscal and economic reforms – namely pension reform – are approved and implemented.

Guedes is a deficit hawk committed to cutting public spending across the board. His mulling of a fiscal stimulus indicates the government’s sense of urgency on the economy.

Another quarter of negative growth would mark Brazil’s sixth recession in 20 years, although it may be significantly lighter and shallower than the bruising 2015-16 crash.

Analysts at ratings agency Moody’s Investors Service on Friday said the rebound from the 2015-16 recession is “the weakest cyclical recovery in decades,” noting private consumption and investment have been particularly weak.

Alberto Ramos, head of Latin American research at Goldman Sachs, went further, calling it the weakest recovery in history.

“After nine quarters into the current up-cycle the performance of the economy has been notably sluggish despite massive slack in terms of resource utilization, a strong external balance sheet, low inflation, and accommodative monetary and financial conditions,” he said.

Real gross domestic product, real GDP per capita, private consumption and capital spending are all significantly lower than their peaks before the recent crash, Ramos notes.

These structural headwinds to growth, together with shocks such as a Vale SA mining disaster in January and the slump in major export destination Argentina, have cast a dark cloud over the outlook.

Economists at Citi cut their 2019 GDP growth forecasts to 0.9% and Rabobank cut its forecast to 0.7% following first-quarter figures on Thursday, below the already weak market consensus of around 1.2%.

Guedes insists the economy will improve if Congress approves the government’s pension reform bill, which seeks to generate public savings of 1.237 trillion reais ($315 billion) over the next decade.

With that, investor, consumer and business confidence will return and the economy will “take off,” he has promised.


Source: Reuters

Executive Summary

1. Reforms and opportunities in India and Brazil. Beyond China, there are opportunities in other developing-world economies. Indian voters just handed a strong reform mandate to Prime Minister Narendra Modi, and India could see a dramatic pickup in economic growth that mandate translates into progress on land reform, labor regulations, and privatizations — especially in the banking sector. Brazil could see progress as it leaves behind a decade of corruption and recession, provided that President Jair Bolsonaro can implement pension reform and convince global investors that the country’s fiscal footing has become more secure. If tax reform followed, it could result in a quickening of global investor interest in Brazilian stocks, and an acceleration in growth. India is further along in the reform effort, and Modi has again demonstrated his political strength; the recent elections are likely to be received well by global investors seeking growth.

2. Market summary. The U.S. market has been caught in a trading range after its powerful move from the December lows, and remains as of this writing about 3% below last year’s highs. There’s a lot of news that market participants could interpret as a justification for a decline, and yet the correction has been modest. We take this to indicate that beneath the daily uncertainty and volatility largely caused by trade-war news, market participants are absorbing positive U.S. trends in employment, wages, economic growth, and central bank policy. As long as those all remain constructive, we remain positive on U.S. stocks.

A tug-of-war is on for the psychology of Chinese retail investors. Pulling in one direction is the fear of the potential consequences of the ongoing trade conflict with the U.S. Pulling in the other direction is a sense of economic patriotism — and the knowledge that the Chinese government has expressed its interest in a stable stock market, and its intention to enhance the stimulus that is bolstering the domestic economy. In the case of a reasonable trade settlement between the U.S. and China, the U.S. market could rally to new high and present an opportunity to take profits.


Source: ETF Trends