Ibovespa drops 2.33% and interest rates rise amid global worsening
The week leading up to the elections in Brazil began in a very tense manner in the financial market. The foreign exchange rate reached R$ 5.4 to the dollar, the highest in more than two months. The benchmark stock index Ibovespa ended Monday’s session down 2.33% and interest rate futures rose at Exchange B3.
The growing tensions in the international scenario, with ever stronger fears of a recession, have hit the already tense local market, which underperformed its peers on Monday. The real had the worst performance among the 33 major global currencies. At the end of the session, the foreign exchange rate advanced 2.52%, to R$ 5.3804 to the dollar – after going as high as R$5.4164. At the end of the day, the Central Bank announced that on Tuesday it will hold a foreign exchange auction of up to $1 billion.
“Now on the eve of the election, there is a tendency for investors to go ‘lighter’ for the weekend, reducing their exposures,” said Fabio Guarda, a partner and manager at Galapagos Capital. “We have a very full week in the country, with the release of [Brazil’s mid-month inflation index] IPCA-15 on Tuesday, the Copom [Monetary Policy Committee] meeting minutes, and the Quarterly Inflation Report. This situation precipitates a little elimination of risk and a reduction of exposure to the local market. They [foreign investors] end up leaving because of a greater risk, which does not necessarily involve a worsening scenario,” he adds.
In the stock market, the negative mood affected the market in general. Only 3 of the 92 Ibovespa stocks ended the trading session with some gain. Among the biggest drops, 3R Petroleum ON lost 6.83%, Petz ON retreated 6.63% and Magazine Luiza ON, 6.26%. Considering the blue chips, Itaú PN retreated 1.80%, followed by Bradesco PN (-1.59%). Vale ON fell 0.83% and Petrobras PN decreased 1.6%. The Ibovespa, after falling 2.33%, closed at 109,114 points – the lowest level since August 9.
In fixed income, the Interbank Deposit (DI) rate for January 2024 rose to 12.95% from 12.81%; and for January 2027, it advanced to 11.695% from 11.38%.
Gustavo Menezes — Foto: Claudio Belli/Valor
Globally, the new tax plan announced by the UK government, which made investors price a significant interest rate hike by the Bank of England (BoE) at its next meeting, was the main catalyst. “The big change came from the behavior of the markets abroad. We ended up entering the stress package in this movement started in the UK yield curve,” said Gustavo Menezes, macro manager at AZ Quest.
According to Mr. Menezes, the emerging currencies, which were somehow holding up against the currencies of developed countries, could not pass unscathed with such a large magnitude of interest rate hikes, which ended up affecting Europe and the United States. He suggests that the market is starting to question and get ahead of possible future postures of other central banks.
The DXY index, which measures the dollar’s strength against a basket of six major currencies, was trading up 0.82% around 6:00 pm, at an all-time high of 114.119 points. Compared to emerging currencies, the dollar advanced 0.92% against the Mexican peso; 0.72% against the South African rand; 2.42% against the Chilean peso; and 0.18% against the Turkish lira.
“Last week, Ibovespa rose more than 2% and the U.S. stock markets closed in sharp decline, so we are left with some fat. And in the final week before the election, it is normal that the stock markets get more nervous,” said Pedro Galdi, an analyst with Mirae Asset. He also highlighted that the possibility of a recession in Europe and the United States, the slowdown in China, and the war in Ukraine contribute to the environment of volatility. “It is the investor who wants to reduce risk by going where there is more liquidity,” says Mr. Galdi.
Regarding the stock market, despite short-term volatility, Goldman Sachs said in a report that Ibovespa could reach 121,000 points as early as 2022. “The move would be consistent with first-quarter levels, although just above our year-end target of 116,000 points,” says the report signed by Ceasar Maasry and Jolene Zhong.
As for positioning for the election, the bank suggests that investors consider domestic cyclical companies. According to the report, the stability in interest rates should help these companies, “a trend probably disconnected with the election result in the very short term, and reasonably insulated from the current significant volatility in global macroeconomic markets.”
*By Augusto Decker, Gabriel Roca, Igor Sodré, Matheus Prado — São Paulo
Source: Valor International