Driven by local and external pressures, exchange rate against the U.S. dollar surged to R$6.26, while the Ibovespa stock index experienced its steepest daily drop since November 2022
12/19/2024
A storm driven by local and external factors sparked another round of turmoil in Brazil’s markets during Wednesday’s session. No asset was spared. The exchange rate per U.S. dollar surged 2.82%, reaching R$6.26, setting a new nominal record and marking the largest daily increase since November 10, 2022, when President Lula, newly elected at the time, criticized pressures for fiscal responsibility. Futures interest rates hit a high of 16% before closing near 15%, while the Ibovespa stock index plummeted 3.15%, ending at 120,772 points—the steepest daily drop also since November 10, 2022, according to Valor Data.
The turbulence began locally early in the morning, as the National Treasury conducted its first public bond buyback auction since 2020, repurchasing 400,000 Series F notes (NTN-F)—well below the 1 million limit set for the transaction. Market participants deemed the repurchase insufficient to contain rising interest rates, given the stronger demand for inflation-linked bonds (NTN-B) or shorter-term securities.
Despite the Treasury’s cautious approach, the reduction in the liquidity cushion hinders a sustained easing of risk premiums, said Denis Ferrari, a fixed income manager at Kinea Investimentos. He argues that “it’s a mistake for the Central Bank not to accept the theory of fiscal dominance.”
Concerns deepened with news that Otavio Ladeira, the public debt undersecretary, had stepped down to take a position at the United Nations, as reported by Valor. The decision, made prior to the recent deterioration of domestic assets, drew attention because of Mr. Ladeira’s effective rapport with the market.
The local situation grew even more precarious as investors fretted over the progress and potential dilution of the fiscal package in Congress. Party leaders in the Lower House reached an agreement to reject stricter rules for the Continuous Cash Benefit (BPC).
The peak of the market’s turmoil came Wednesday afternoon with the release of U.S. economic projections that tempered expectations for interest rate cuts. Federal Reserve Chair Jerome Powell reinforced this outlook by saying that inflationary pressures warrant greater caution in reducing rates.
By the end of the session, the Brazilian real was the worst performer among the 33 most liquid currencies tracked by Valor. The Hungarian forint followed, while the U.S. dollar gained 2.30% against the euro.
The real’s depreciation prompted currency traders to anticipate intervention from Brazil’s Central Bank, as heightened volatility suggested a potential shortage of currency in the market. However, it wasn’t until the day’s end that the Central Bank announced a spot-market dollar auction scheduled for this Thursday morning, with an offering of up to $3 billion.
Caio Megale, chief economist at XP, said interventions by the Central Bank and Treasury buyback auctions are likely to have “limited impact” due to deeper “economic fundamentals” issues. “There’s no indication that fiscal responsibility is a short-term priority,” he said. Mr. Megale argued that Brazil had “missed the chance” to stabilize the exchange rate at R$5.60 and the Selic rate at 12%. “The new equilibrium might settle at an exchange rate between R$6.10 and R$6.20 and the Selic at 15%,” he added.
Mr. Megale further argued that the sharp deterioration in domestic assets is not due to “market irrationality” but rather a “loss of reference.” “We’re asking ourselves where interest rates, exchange rates, and inflation will stabilize. When there’s no reference point, any number becomes possible.”
Chris Turner, head of global markets at ING, attributed the ongoing sell-off of the real to fiscal concerns. “The suspicion is that the Lula administration will maintain loose fiscal policy heading into the 2026 elections, resisting pressure from Brazilian assets,” he noted in a statement.
Adding to the fiscal deterioration, the Fed released its interest rate projections for 2025 and beyond, showing rates higher than those expected in September. This indicated a more cautious approach to rate cuts, favoring the dollar’s global appreciation.
Felipe Sichel, chief economist at Porto Asset, noted the difficulty of attributing weight to individual factors amid simultaneous market movements. “When everything moves at once, it’s hard to gauge the relative importance of each factor. What’s clear is that the real is among the worst-performing currencies this year. Until recently, it was the second worst, only behind the Russian ruble, since the U.S. elections,” he said.
“There’s a global phenomenon at play, with currencies depreciating against the dollar across the board. However, there’s also a domestic factor tied to worsening fiscal expectations in the short, medium, and long term,” Mr. Sichel added.
The economist also suggested that seasonal pressures could be affecting the currency market but emphasized that other local assets are also underperforming. “There’s a broader environment of asset deterioration, reflecting weaker fundamentals, such as worsening inflation expectations in the Focus report,” Mr. Sichel explained.
In the stock market, the Ibovespa posted a trading volume of R$26.4 billion for the session and R$34 billion on the B3. Only three stocks posted gains: Marfrig (1.81%), MRV (1.54%), and Santos Brasil (0.54%).
Conversely, Automob shares experienced a correction, falling 30% after two consecutive sessions of sharp gains. Domestic stocks such as CVC (-17.11%) and Magazine Luiza (-10.04%) also posted significant losses, driven by soaring future interest rates.
Despite the Ibovespa’s 3.9% decline so far this month, Welliam Wang, equity manager at AZ Quest, highlighted the index’s relative resilience compared to other markets, such as foreign exchange and interest rates. He attributed this to the significant weighting of commodity companies in the index. “When we look at the small-cap index, we see a steeper decline because it’s tied to more domestically focused stocks. The Ibovespa’s composition helps mitigate volatility,” Mr. Wang concluded.
The domestic environment has also drawn the attention of global investors. On social media, Mohamed El-Erian, chief economic advisor at Allianz, described Brazilian markets as undergoing a classic emerging-market depreciation. He noted that a fundamental trigger, combined with a weak technical backdrop, has led to a sell-off. “The current race is between ‘circuit breakers’ on one side and a poor technical environment dragging down fundamentals on the other,” he said.
*By Arthur Cagliari, Bruna Furlani, Gabriel Caldeira, Gabriel Roca, Maria Fernanda Salinet e Victor Rezende — São Paulo
Source: Valor International