Local assets rebound in line with global markets

By the end of the session, the dollar had fallen 0.41% to R$5.5644 in the spot market, while the Ibovespa gained 0.59% to close at 134,167 points. Internationally, the DXY index—which tracks the dollar’s performance against a basket of major currencies—fell 0.64% by the time Brazilian markets closed, reaching 97.85 points.

Tensions between Washington and Brasília intensified last week following precautionary measures by Brazil’s Federal Police against former President Jair Bolsonaro (Liberal Party, PL) and the U.S. government’s retaliatory move to revoke visas of Supreme Court justices. However, on Monday, there were no new developments, which, combined with a weaker dollar among both developed and emerging market currencies, brought relief to Brazilian markets, according to Eduardo Aun, macro portfolio manager at AZ Quest.

“There was a lot of concern over the weekend that the U.S. might impose sanctions beyond tariffs, but in the end, that didn’t happen. It could have been worse. Markets were pricing in the risk of something much harsher,” Mr. Aun noted. As a result, he said, markets corrected on Monday after the worst-case scenarios failed to materialize.

Mr. Aun pointed out that the Brazilian real had already been outperforming other emerging market currencies, largely driven by the carry trade—borrowing in low-interest-rate currencies to invest in higher-yielding ones like the real. With short-term yields in Brazil offering 8% to 9% returns and expectations for lower volatility, the currency had become particularly attractive.

However, Mr. Aun warned that Trump’s proposed 50% tariffs could reverse this favorable dynamic. Trade balance impacts are expected to dampen Brazil’s economic growth, and uncertainties around the scope of the tariffs are likely to keep market sentiment cautious until there is more clarity after the August 1 deadline. “The natural response is to reduce positions,” he said.

Morgan Stanley remains bullish on the real, citing the Brazilian Central Bank’s hawkish stance as a key support factor. “We maintain our view that the window of opportunity for real appreciation remains open (likely through August), assuming no escalation in tariff rhetoric from the U.S.,” analysts at the American bank wrote in a client report.

In the interest rate markets, concerns over worsening Brazil-U.S. relations were evident early in the session, with rates rising despite improved inflation forecasts reflected in the Focus Report. However, fixed-income traders reported signs of foreign capital inflows, helping to push down long-term rates. This movement also tracked the decline in U.S. Treasuries, with 10-year yields falling from 4.423% to 4.384%. Brazil’s DI rate for January 2029 fell from 13.64% to 13.59%.

On the stock exchange, Petrobras preferred shares rose 0.19%, while Vale shares jumped 2.73%. Market participants remain closely monitoring the flow of capital in the Brazilian equity market. In recent days, foreign investors have posted eight consecutive sessions of net outflows, while local institutional investors recorded six straight days of net inflows through July 17.

Last Thursday alone, foreign investors withdrew R$883.8 million, bringing the monthly outflow to R$5 billion. Meanwhile, institutional investors added R$886 million, though their monthly balance remains slightly negative at R$117.3 million.