Ibovespa falls sharply, real weakens to R$5.91 per dollar amid global sell-off
04/08/2025
A surge in global market volatility led to broad losses in Brazilian assets on Monday (7), following renewed trade tensions between the United States and China. A threat by U.S. President Donald Trump to impose an additional 50% tariff on Chinese products hit emerging markets hard, dragging down Brazilian stocks, pushing the U.S. dollar to its highest level against the real since February 28, and driving long-term interest rates higher.
Mr. Trump’s increasingly aggressive trade stance has stoked recession fears in global markets in recent sessions. Following several banks’ warnings about a possible recession this year, Goldman Sachs lowered its U.S. GDP growth forecast from 1% to 0.5% and raised its 12-month recession probability from 35% to 45%.
Against this backdrop, emerging market assets underperformed developed markets on Monday. In Brazil, the foreign exchange rate jumped 1.29% to R$5.91 per dollar. The U.S. currency posted even larger gains against other emerging market currencies, including the Colombian peso, Chilean peso, and South African rand.
In equities, benchmark Ibovespa dropped 1.31%, mirroring the decline in the iShares MSCI Brazil ETF (EWZ) in New York, which fell 2.24%. This contrasted with the near-flat performance of the S&P 500, which dipped 0.23% amid a volatile session. Emerging market stocks (EEM) slumped 3.72%, largely dragged down by Asia. The iShares MSCI China ETF (MCHI) ended the day with a steep 8% loss.
Emerging market impact
The slowdown in the U.S. economy could also weigh on emerging markets, said Gilberto Nagai, head of equities at SulAmérica Investimentos. “What we’re seeing unfold doesn’t look like a good deal for anyone—it’s full of uncertainty and depends entirely on Trump. If the U.S. economy slows significantly, there will be a broad risk-off movement across markets,” he said.
Fears of a Chinese slowdown triggered another sharp drop in oil prices, which fell for a third straight session. The decline pressured oil-related stocks on the Ibovespa after China announced reciprocal tariffs on Wednesday.
Markets are now discussing whether the sharp drop in oil could force Brazil’s oil giant Petrobras to adjust gasoline prices. Ativa Investimentos said the move would be negative for Petrobras shares, particularly after the company cut diesel prices just 60 days after a price hike announced on January 31.
“If another price cut is confirmed, it would be the third move in less than 120 days, exposing the company’s pricing policy—designed to shield domestic prices from barrel volatility—as ineffective,” analysts said.
Rising interest rates
Brazilian interest rates also provided no support for stocks. Long-term yields rose steadily throughout the session as investors corrected recent excesses and tracked the uptick in U.S. Treasury yields.
At the close, the DI (Interbank Deposit) rate for January 2029 climbed from 14.03% to 14.16%, and the January 2031 DI advanced from 14.35% to 14.48%.
Citi said it closed its positions betting on falling interest rates futures and on rising fixed-rate NTN-F bonds maturing in January 2029. “While we still believe the economic outlook supports medium-term disinflation and lower long-term rates in Brazil, we’re concerned about the spillover effects from equity market selloffs via the dollar/real, along with potential idiosyncratic risk surprises,” the bank’s strategists said.
On the other hand, Morgan Stanley strategist, Ioana Zamfir, doubled down on her position, betting on a decline of Brazilian interest rate futures (January 2029 DI), and added a new bet on falling prices of inflation-linked NTN-B bonds maturing in August 2028.
Ms. Zamfir said the rates position reflects expectations of a potential slowdown in Brazil’s economy amid relatively muted fiscal policy risks and a more favorable global interest rate environment. She described the short position on medium-term real interest rates as “extremely attractive” and argued “it does not match global growth risks or Brazil’s medium-term economic outlook.”
Challenging environment
Vagner Alves, fixed-income portfolio manager at Kinea Investimentos, said that while the market reaction has been sharp, emerging markets will likely continue to suffer as recession fears grow. “In this environment, it’s natural for emerging market assets to lose more value—especially those tied to commodity prices, like Brazil’s,” he said.
“The recent moves happened very quickly, so we may see a partial correction, but that’s more likely in U.S. markets. For emerging markets, the environment remains challenging,” said Mr. Alves.
A reversal in this scenario would require a drastic shift in the U.S. government’s stance, “but there’s no sign of that—quite the opposite. There was even a rumor today [Monday] of a [tariff] delay, but the White House quickly denied it,” he noted.
Despite investor fears about a severe global slowdown, Mr. Alves said the downturn may not be so deep. “Countries still have fiscal tools they can use. That could help reverse the current market gloom,” he said.
Marcello Siniscalchi, a partner at Asset 1, said the slightly more resilient performance of Brazilian assets in recent sessions was partly due to Brazil facing a lower tariff rate of 10%. He also noted that foreign investors had already reduced their exposure to local markets, leaving them with fewer positions to liquidate. “Investors held a certain position based on a specific volatility pattern. When that pattern changed, they had to cut back,” he said.
Currently, Asset 1 has a clearer outlook on equities and interest rates than on currencies. The firm’s chief economist, Luis Cezario, said they expect a slowdown in the U.S. and Europe, and foresee back-and-forth developments in trade negotiations between the two sides. As a result, he said it will be hard to predict currency moves.
“It’s difficult to know how the dollar will behave against the euro, or whether it will strengthen. Will Europe remain a more independent player? Tariffs lead to lower growth and higher inflation. It’s easier to believe that equities will fall in a recession than to predict which currency will come out on top,” he said.
*By Maria Fernanda Salinet, Arthur Cagliari, Bruna Furlani and Gabriel Caldeira — São Paulo
Source: Valor International