Investors react to policy uncertainty and fiscal risks as exchange rate per U.S. dollar rises to R$5.80 and interest rates climb
02/27/2025
Domestic market stability, which had marked 2025 so far, was shaken by a wave of news from Brasília. Uncertainty over a cabinet reshuffle, strong labor market data, and indications that the government is gearing up to counter an economic slowdown pressured Brazil’s real, while the benchmark Ibovespa stock index fell and interest rates surged across the yield curve.
By the end of the trading day, the exchange rate per U.S. dollar rose 0.83%, closing at R$5.80 in the spot market. Near the close, the Brazilian real showed the worst performance among the 33 most traded currencies monitored by Valor. Meanwhile, the Ibovespa dropped 0.96%, ending at 124,769 points.
The session highlighted growing investor pessimism regarding the government’s economic policies. The market interpreted strong labor market data from CAGED as evidence of a resilient economy, even as the Central Bank works to cool activity and ease inflationary pressures. This task is becoming more challenging amid a wave of stimulus measures aimed at boosting consumption, including relaxed access to FGTS workers’ severance fund, increased payroll-deductible credit, and the proposed reinstatement of Income Tax exemptions planned for 2025.
If approved, these measures could undermine the effectiveness of monetary policy, potentially requiring the Central Bank to maintain higher interest rates to meet inflation targets. In this context, interest rate futures also faced significant negative performance, closing the day sharply higher.
The yield on the January 2027 Interbank Deposit (DI) contract jumped from 14.47% to 14.79%, while the January 2029 DI increased from 14.40% to 14.81%.
Political volatility
Luiz Eduardo Portella, partner and manager at Novus Capital, noted that renewed political activity in Brasília has contributed to increased market volatility, a trend that became more evident at the start of the week. He added that the robust labor market data suggests a slow economic slowdown and that the government’s recently announced measures are raising red flags for the markets.
In this context, Mr. Portella said Novus Capital is maintaining long positions in longer-term interest rate futures, given the view that the market is currently underpricing fiscal risks. “The market dreamed about the 2026 election [and a potential change in power], but that is still far off. We will see volatility until then,” he said.
Marcos Weigt, treasury director at Travelex Bank, noted that local conditions weighed on trading as the government appears to lack a clear strategic plan, instead pursuing piecemeal spending measures that stimulate the economy. “I don’t think the government will implement a large, one-off spending initiative. They are likely to adopt gradual stimulus measures, such as releasing FGTS funds and reinstating Income Tax exemptions. This raises concerns,” he said.
Regarding the Income Tax exemption proposal, Mr. Weigt said, “I believe the bill will pass smoothly in Congress, but the compensatory measures won’t. There will be a lot of debate, a lot of ‘let’s see,’ and pressure from interest groups. That’s the issue because, in the end, nothing will be fully offset, worsening the fiscal outlook even further.”
The real’s depreciation also received a boost from rumors that President Lula was advised to move Finance Minister Fernando Haddad to the Chief of Staff Office. On this, Mr. Weigt noted, “There could be political reasons to remove Haddad, but from a market perspective, his removal would worsen asset prices significantly. All the names currently being considered to replace him would be poorly received by the market.”
Corporate earnings
In the stock market, corporate earnings reports also influenced share prices. Shares of WEG, a Brazilian industrial equipment manufacturer, fell sharply by 8.68%, while Ambev, the largest brewer in Latin America, surprised investors with strong earnings, leading to a 5.5% rise in its stock.
Augusto Lange, partner and equity manager at Neo Investimentos, noted that the sharp volatility in some stocks following earnings reports has been striking. He explained that one reason for this market behavior is the high cost of holding stocks amid expectations of a 15% interest rate. “If the cost of holding is high, bad news hits harder because investors are less willing to hold on for long,” he said.
Mr. Lange observed that while earnings results have generally met expectations, forward guidance has disappointed investors by confirming an economic slowdown and growing challenges for companies in increasing revenue. “These factors have impacted post-earnings performance more than the numbers themselves,” he noted.
Mr. Lange, who co-manages Neo Investimentos’s multimarket fund, revealed that he had bought local stocks in December but decided to close his directional equity positions after the sharp rally in January, citing reduced return potential.
International markets also faced headwinds. U.S. President Donald Trump renewed threats to impose 25% tariffs on products from the Eurozone. However, the impact on financial markets was limited. On Wall Street, the Dow Jones fell 0.43%, the S&P 500 dipped 0.01%, and the Nasdaq edged up 0.26%. The yield on the 10-year U.S. Treasury note declined from 4.30% to 4.26%.
*By Gabriel Rocca, Bruna Furlani, Arthur Cagliari e Gabriel Caldeira — São Paulo
Source: Valor International