The beginning of the week was turbulent in the global markets. Little by little, the market has been adjusting to a more challenging landscape, as the U.S. Federal Reserve is expected to speed up the tightening cycle. The looming scenario of lower liquidity helped to bring down stock markets in New York on Monday and Brazil’s benchmark stock index Ibovespa. At the same time, the dollar is gaining ground as yields of 10-year Treasuries returned to 3%.

It was the first time since November 2018 that the yield on the 10-year T-note reached 3%. This week, the market expects the Fed to pick up the pace, raising interest rates by 50 basis points and unveiling the start of a balance sheet reduction.

In the currency markets, the reaction has been clear. The DXY index, which measures the value of the dollar against a basket of six hard currencies, is trading above 103 points, the highest in 20 years. In Brazil, the foreign exchange rate surged 2.6% on Monday, to R$5.0708 to the dollar, which led the Central Bank to schedule an extraordinary auction of up to 20,000 foreign exchange swap contracts, equivalent to $1 billion, for Tuesday.

“The real still boasts the best performance against major currencies this year, but an important part of that stellar performance has been reversed in recent days,” Santander’s analysts wrote in a weekly report on the macroeconomic outlook. For them, the movement of the exchange rate is not much linked to local factors, but rather to the prospects of weaker global growth and monetary tightening in developed economies.

“Not even the negative result of the U.S. GDP in the first quarter reduced expectations of tighter monetary conditions ahead, as domestic demand remains firm and inflation pressures remain under the spotlight,” the analysts with Santander wrote. They also stressed that the adverse circumstances abroad “have triggered the ‘risk-off’ mode in global markets, which – along with the decline in commodity prices – has likely led to some profit taking on the real.”

The risk-averse sentiment also reached Brazilian stocks. The Ibovespa ended Monday’s trading session at 106,638.64 points, the lowest level since January. In New York, the main stock indexes fell during the day but ended the trading session on the rise – the Dow Jones rose 0.26%, the S&P 500 advanced 0.57% and the Nasdaq climbed 1.63%.

“Lockdowns in China have slowed the local economy and put further pressure on prices around the world, increasing the chances of the Fed tightening its stance on Wednesday. If we also consider the prolongation of the Russia-Ukraine war and the weakening of corporate results, we have a perfect storm that forces agents to somewhat reduce risks,” said César Mikail, equity fund manager at Western Asset.

Along this line, and considering specifically the Ibovespa, he cited the slowdown of the foreign capital flow to local assets without a recovery of domestic players, which left the market “without a marginal buyer.” Until April 28, international investors had taken R$5.9 billion from B3’s secondary market in the month.

The shock of the Treasuries yield curve took the future interest rates up in Brazil, especially the long-term ones. The interbank deposit (DI) rate for January 2027 rose to 11.98% from 11.85%, after reaching an intraday high of 12.055%. Exchange rate swings also helped the DIs to rise.

Expectations for the Fed’s decision contributed to strengthening the dollar, but the real lost ground against its peers partly because of local factors as well, said Thiago Melzer, a partner and co-founder at Upon Global Capital.

Mr. Melzer stressed that the latest polls have shown that the election will be more competitive than previously expected, which increases uncertainty. In addition, he said there was a widespread expectation that, with the consolidation of former president Luiz Inácio Lula da Silva’s favoritism in the polls, foreign investors would expand their positions in Brazil. “Most of the capital inflow [earlier this year] was driven by the electoral scenario that had been materializing in favor of Lula,” he said. “Foreign investors remember that they made a lot of money between 2002 and 2010,” when Mr. Lula da Silva was in office.

Mr. Melzer also notes that the firm appreciation of the real has left the Brazilian foreign exchange market in a more fragile position. “There was an extremely large flow to Brazil, the real was the go-to currency,” he said. He says that local investors also took positions in favor of the real through a strategy that became quite common: to be short on the dollar in Brazil and on the stock market. “It created this snowball effect and the technical position became horrible,” he said.

Source: Valor International

https://valorinternational.globo.com