Expectation for Chinese stimulus packs drives good mood as investor awaits Fed decision
Eduardo Cotrim — Foto: Luciana Whitaker/Valor
The good mood is evident in the markets at the beginning of the week, and the prospect of new stimulus in China sent Brazilian assets soaring to levels never seen this year. The Ibovespa, Brazil’s benchmark stock index, reached 121,000 points, while the foreign exchange rate fell to its lowest level since April 2022, at R$4.7326 to the dollar. Another factor in this scenario is the steady decline in interest rate futures, as market participants renew expectations that the global monetary tightening cycle is nearing its end.
The quarterly meeting on economic affairs of the Politburo, the committee composed of the top leaders of the Chinese Communist Party, brought tailwinds for Brazilian assets. The body expressed concern about the fragile performance of the Chinese economy and hinted at new stimulus measures to come. Although no announcement was made, the hope of supporting economic activity supported commodity prices and was positively reflected in the domestic market.
The Ibovespa rose 0.94% to 121,342 points, its highest level since April 1, 2022, as it was supported by shares of companies linked to commodities. The exchange rate, in the other hand, traded lower for most of Monday’s session and closed down 1%, a move that was also seen in other emerging markets.
“I had a slightly more positive reading of the meeting. Although no major effective measures were announced, the communication indicates an attempt to address in the speech a greater concern for the economy and an attempt to counterbalance the current dynamics. In this line, they noted that domestic demand is weaker, that economic growth is more difficult and did not repeat the phrase ‘housing is for living, not speculation’, which indicates concern about the construction sector,” said Thiago Ojea, a partner and business analyst at Apex Capital.
For him, the cautious tone adopted by the Politburo “makes the market expect strong economic measures again, which could benefit assets.” In Monday’s session, Vale’s common shares rose 3.02% and CSN’s shares rose 2.59%. In addition, in line with the rise in oil prices, Petrobras common shares rose 2.07%, while preferred ones gained 2.09%.
After the Politburo meeting on economic issues, Apex says it is less pessimistic, but in Mr. Ojea’s view, “it’s still too early to make any major investment decisions.” “We need to wait for what the actual measures will be,” the analyst said.
Expectations of further stimulus measures for the Chinese economy were also welcomed in the foreign exchange market, where the exchange rate again reached its year’s lows. In addition, market participants believe that there is room for the exchange rate to continue on an appreciation path in the third quarter.
“We still expect the real to outperform its peers in the near term as fundamentals remain relatively strong and the carry remains high,” said Andrea Kiguel, a strategist at Barclays, in a note to clients. The British bank sees the exchange rate at R$4.65 to the dollar in September and R$4.75/dollar at the end of the year. “We believe the exchange rate can withstand the first cuts in the key interest rate Selic well, as real interest rates are quite high, and the cycle of cuts priced in is small compared to other emerging markets.”
Eduardo Cotrim, an asset manager at JGP, also notes that the global behavior of the dollar, which has remained at weaker levels, also helps consolidate the domestic exchange rate at a more appreciated level. In addition, he points out that the evolution of the trade balance also supports the currency appreciation, especially due to the bumper crop in the first half of the year.
However, Mr. Cotrim notes that there is a seasonal factor in the foreign exchange contracting and the second half of the year tends to be a more difficult period for the real due to year-end imports and remittances of profits and dividends. “Seasonally, the second half of the year is not as positive as the first. Therefore, I believe that in in this second half of the year the movement of the real should be even more linked to the global dollar. At the beginning of the year, we even saw the real perform better, but in the second half of the year, we have the head that the Brazilian currency should oscillate more in line with other currencies.”
In this sense, Mr. Cotrim notes that, although local assets have seen a positive performance in the first half, given the prospect of falling interest rates and an external scenario that has allowed this good phase, the moment ahead requires caution. “It’s not our privilege. We are surfing along with other markets,” said the asset manager, citing Chile as an example, where aggressive rate cuts are expected.
“In addition, disinflation in the U.S. is much better than expected and risk assets are doing very well. It is a positive moment, but it requires caution,” he said.
In addition, the week holds plenty of volatility. On Tuesday, Brazil’s mid-month inflation index IPCA-15 for July stands out and, on Wednesday, the monetary policy decision of the Federal Reserve (Fed) will draw the attention of financial players. These two events must be watched closely as investors look to calibrate bets around the start of the Selic cuts, which are expected to take place in August.
“We continue to see the same dynamics as at the end of last week, with the external scenario surfing on the ‘Goldilocks’ [term inspired in the child’s classic Goldilocks and the Three Bears, refers to a growth environment without inflationary pressures] scenario in the U.S. and the ‘players’ starting to move towards a bet on a more ‘dovish’ outcome in the next Monetary Policy Committee (Copom) decision,” said the operator of a large local bank, noting that there is a technical tie in the 25-basis-point and 50-bp cut bets for the August meeting. “We have to wait for the IPCA-15 because this reading will define the market’s bet on the Copom result.”
On Monday, the DI rate for January 2024 fell to 12.7% from 12.73% in B3, while the DI rate for January 2025 fell to 10.7% from 10.765%.
*Por Matheus Prado, Victor Rezende, Arthur Cagliari, Gabriel Roca — São Paulo
Source: Valor International