Investors once again showed risk aversion in the trading session on Tuesday, triggering a rush to protection. As a result, the dollar gained ground, the stock markets went south around the world and, in Brazil, interest rates faced a new day of stress. In the local market, the foreign exchange rate reached the R$5 threshold again, while benchmark stock index Ibovespa saw a seventh straight day of losses, a situation seen for the last time in May 2016, at the height of the crisis that led to the impeachment of former President Dilma Rousseff.

The Ibovespa closed down 2.23%, at 108,212.86 points, the lowest level since January 24. In the first trading session of April, Ibovespa was up 16% in the year, but those gains were reduced to less than 4% after Tuesday’s session. The exchange rate ended the day up 2.35%, at R$4.99 to the dollar, despite the extraordinary auction of 10,000 foreign exchange swap contracts by the Central Bank.

Concerns about a faster tightening of monetary policy in the United States have been compounded by the prospects of slow global growth, with signs that China will maintain strict policies to control the pandemic. This combination has made the global scenario more complex and has fueled broad risk-averse behavior.

Brazilian assets, which had seen substantial gains in the first quarter, are deteriorating fast against a backdrop of lower demand for risk.

“The last few days have been of very intense movement of the exchange rate. The appreciation had been a bit exaggerated and now there is a strong realization,” said Adauto Lima, the chief economist of Western Asset in Brazil. He notes that commodity prices have cooled in recent days and highlighted, in particular, the scenario of a stronger global economic slowdown, which has fed risk aversion in the markets.

“When you add monetary policy in the U.S., the Chinese economy growing less due to restrictions and structural issues, the perception of risk and insecurity is very big,” he said. In addition, he cites the uncertainty with the impacts of the war in Ukraine, which increased again after Russia cut off natural gas supplies to Poland and Bulgaria.

The stress seen in the foreign exchange market also drove up future interest rates, which showed a firm increase throughout the entire term structure of the curve. The rate of the interbank deposit (DI) contract for January 2025 rose to 12.14%, from 11.99% at the previous closing, while the rate for the January 2027 contract climbed to 11.97% from 11.82%.

“Despite recent strengthening, we expect a less benign global environment for the real ahead. Currently, the fundamentals point to mixed directions for the real: while on the one hand a stronger dollar and higher risk aversion is likely to weaken it, the new round of commodity price increases is likely to have a positive effect on it,” Citi’s economic team for Latin America wrote.

According to the team, the effect of commodities on the exchange rate in Brazil had been prevailing until recently, but this situation may change in the short term. “We see increasing risks for a less benign global environment for emerging markets due to the expected monetary tightening in the U.S. Moreover, a potential additional round of dollar strengthening amid lower commodity prices may exacerbate the negative impacts on the real, supporting our projection [an exchange rate at] R$5.19 to the dollar by the end of 2022,” Citi said.

The dollar gained ground against other emerging currencies as well, but more moderately. The greenback advanced 0.94% against the Mexican peso, rose 0.92% against the South African rand and gained 0.31% against the Chilean peso.

Tomas Awad, founding partner at 3R Investimentos, said that even during the first quarter, when local assets appreciated, he had little conviction that the stock market rally was sustainable. “I don’t see many ways for the rally to continue, especially because I didn’t see it back there either. The scenario of sideways movement in the stock market is not much to complain about.”

According to him, the global backdrop is quite challenging, with high inflation, monetary tightening in the United States, slowing growth in China and troubled geopolitics. As the Brazilian economy has little consistent fundamentals, in his view, Mr. Awad prefers industries linked to basic consumption in the local stock market.

Besides the fragility of the external scenario on Tuesday, local market participants received poorly the results of Santander Brasil in the first quarter. Thus, the financial industry, one of the few in Ibovespa that had been showing resilience in recent days, closed the day with widespread losses. Santander fell 4.55%, while Banco do Brasil dropped 2.25%. The preferred shares of Bradesco and Itaú declined 4.29% and 3.4%, respectively.

Global investors are increasingly wary since last week, when Federal Reserve Chair Jerome Powell endorsed remarks by members of the Federal Open Market Committee (FOMC) that a faster interest rate hike in the country is an option. At the same time, financial agents are monitoring the evolution of the pandemic in China, with fears that Beijing will be subjected to the same level of restrictions seen in cities such as Shanghai.

Source: Valor International

https://valorinternational.globo.com