Assessment that key rate Selic will stay at 13.75% prevails, sustains rally of risk assets

08/05/2022

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Benchmark stock index Ibovespa showed a firm rise on Thursday — Foto: Silvia Zamboni/Valor

A clearer signal from the Central Bank’s Monetary Policy Committee (Copom) about the end of the cycle of Selic hikes was all it took for the market to start a rally in Thursday’s trading session.

The indication by the committee that in September it will evaluate the need for a residual adjustment in the key rate brought down future interest rates, insofar as market participants were waiting for the Central Bank’s signal to set up positions betting on a drop in interest rates. The inflow in the interest and fixed income markets helped to bring down the foreign exchange rate and, in face of such an intense fall in future rates, benchmark stock index Ibovespa showed a firm rise and even tested the 106,000-point level throughout the session.

The entire yield curve showed a sharp decline in Thursday’s trading session, with emphasis on medium- and long-term rates. The interbank deposit rate (CDI) for January 2025 fell to 12.09% from 12.47%, while the CDI for January 2029 retreated to 12.3% from 12.65%.

Although Copom has kept the door open for a residual adjustment in the Selic in September, the change in the committee’s communication, now saying that it will evaluate if an additional hike is necessary, reinforced the perception among market participants that the cycle may have ended on Wednesday, when the Selic reached 13.75%.

Part of the market still points to the chance of a 25-basis-point increase in September, while banks such as Bradesco, Barclays, Itaú Unibanco and Banco do Brasil have maintained their projections of a Selic rate of 13.75% at the end of the year.

In the interest rate market, the willingness to risk was substantial, and in the first deals of the day, the rates already showed relevant drops. The movement intensified throughout the day, as more players built positions in an attempt to take advantage of the downward movement of rates.

Citi, for example, has set up a position to gain from falling rates for the interbank deposit (DI) in January 2025. “We like this point on the curve to capture more cuts,” said strategists Andrea Kiguel and Dirk Willer in a report sent to clients, where they justify the position.

They note that the 1-year rate is now below the Selic level, which historically indicates that the cycles tend to change direction, unless there are risk aversion events that make this dynamic unfeasible in the market. For Ms. Kiguel and Mr. Willer, “the risks for the trade include another global inflationary shock or stronger than expected inertia, which would make the Central Bank more hawkish in relation to expectations, in addition to electoral noise.”

For Victor Candido, chief economist at RPS Capital, “when the end of the cycle is announced, the positions go in the same direction and the fixed interest rate melts.” He believes the movement is natural, but points out that, despite his long position and the fact that he likes this position, he has doubts about the sustainability of the movement ahead.

“I think the level of interest rates in this cycle will be higher than the market wants to believe. There’s a lot of stimuli in the economy and the government is putting even more into an economy with the labor market gap closed. I think activity will remain challenging for the Central Bank. What can help – and has already contributed a lot – is the fact that commodity prices, especially oil, are falling a lot and this encourages the market even more with this trade of lower interest rates,” says Mr. Candido.

Adverse surprises on the fiscal front and in the economic activity scenarios may even push the Copom to act again in September, but the committee decision on Wednesday gave the impression that the monetary authority “would prefer to leave interest rates where they are,” said Roberto Secemski, chief economist for Brazil at Barclays, whose baseline scenario indicates that the tightening cycle has come to an end with the Selic at 13.75%.

In his view, if medium-term inflationary expectations do not change much until the September meeting, the Copom may keep interest rates unchanged at 13.75%. “Of course, adverse surprises on the fiscal, labor market and/or growth fronts could also push the Central Bank to act, but our impression is that, all else being equal, it would prefer to leave interest rates where they are, also because of the extension of the relevant horizon into 2024 (when it wants to avoid the risk of going below target),” says Mr. Secemski.

The market’s good mood with the fall in interest rates was reflected in a greater demand for fixed-rate government securities in the weekly auction held by the National Treasury, which increased the supply of securities. The Treasury managed to sell in full 9 million National Treasury Bills (LTNs) maturing in January 2025, in addition to 300,000 fixed-rate bonds (NTN-Fs), which are longer term fixed-rate securities usually in demand by foreign investors.

Laszlo Lueska, a partner and manager at Octante Capital, says that the softer-than-expected decision by the Copom, indicating the end of the monetary tightening cycle, “generated optimism in foreigners, who brought dollars today to invest in fixed rate.” Not by chance, on a day when the dollar was weaker worldwide, the domestic forex market managed to benefit. Thus, the exchange rate ended the trading session at R$5.2219 to the dollar, down 1.06%.

The Ibovespa took advantage of the significant drop in long interest rates and ended the Thursday up 2.04%, at 105,892 points, the highest level since June 10. “The recovery will not be a straight line. We will have volatility, but a big restriction on Brazil seems to be behind us. My scenario for Brazil is less negative than the market average, despite the risks (fiscal and political). There seems to be enough risk premium in local assets and margin of safety,” said Dan Kawa, chief investment officer at TAG Investimentos.

Ibovespa’s best performing companies were, precisely, those linked to the local economic activity, such as the retail and construction sectors. The common shares of Magazine Luiza, for instance, jumped 13.99%, while those of Via rose 12.6%.

*By Victor Rezende, Igor Sodré, Augusto Decker — São Paulo

Source: Valor International

https://valorinternational.globo.com/