{"id":92271,"date":"2024-12-19T18:19:35","date_gmt":"2024-12-19T21:19:35","guid":{"rendered":"https:\/\/murray.adv.br\/?p=92271"},"modified":"2024-12-19T18:19:36","modified_gmt":"2024-12-19T21:19:36","slug":"credibility-crisis-triggers-new-sell-off-of-brazilian-assets","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/credibility-crisis-triggers-new-sell-off-of-brazilian-assets\/","title":{"rendered":"Credibility crisis triggers new sell-off of Brazilian assets"},"content":{"rendered":"\n
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<\/em><\/strong><\/h6>\n\n\n\n

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12\/19\/2024 <\/p>\n\n\n\n

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A storm driven by local and external factors sparked another round of turmoil in Brazil\u2019s markets during Wednesday\u2019s 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\u2014the steepest daily drop also since November 10, 2022, according to Valor Data.<\/p>\n\n\n\n

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)\u2014well 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.<\/p>\n\n\n\n

Despite the Treasury\u2019s 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 \u201cit\u2019s a mistake for the Central Bank not to accept the theory of fiscal dominance.\u201d<\/p>\n\n\n\n

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\u2019s effective rapport with the market.<\/p>\n\n\n\n

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).<\/p>\n\n\n\n

The peak of the market\u2019s 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.<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

The real\u2019s depreciation prompted currency traders to anticipate intervention from Brazil\u2019s Central Bank, as heightened volatility suggested a potential shortage of currency in the market. However, it wasn\u2019t until the day\u2019s end that the Central Bank announced a spot-market dollar auction scheduled for this Thursday morning, with an offering of up to $3 billion.<\/p>\n\n\n\n

Caio Megale, chief economist at XP, said interventions by the Central Bank and Treasury buyback auctions are likely to have \u201climited impact\u201d due to deeper \u201ceconomic fundamentals\u201d issues. \u201cThere\u2019s no indication that fiscal responsibility is a short-term priority,\u201d he said. Mr. Megale argued that Brazil had \u201cmissed the chance\u201d to stabilize the exchange rate at R$5.60 and the Selic rate at 12%. \u201cThe new equilibrium might settle at an exchange rate between R$6.10 and R$6.20 and the Selic at 15%,\u201d he added.<\/p>\n\n\n\n

Mr. Megale further argued that the sharp deterioration in domestic assets is not due to \u201cmarket irrationality\u201d but rather a \u201closs of reference.\u201d \u201cWe\u2019re asking ourselves where interest rates, exchange rates, and inflation will stabilize. When there\u2019s no reference point, any number becomes possible.\u201d<\/p>\n\n\n\n

Chris Turner, head of global markets at ING, attributed the ongoing sell-off of the real to fiscal concerns. \u201cThe suspicion is that the Lula administration will maintain loose fiscal policy heading into the 2026 elections, resisting pressure from Brazilian assets,\u201d he noted in a statement.<\/p>\n\n\n\n

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\u2019s global appreciation.<\/p>\n\n\n\n

Felipe Sichel, chief economist at Porto Asset, noted the difficulty of attributing weight to individual factors amid simultaneous market movements. \u201cWhen everything moves at once, it\u2019s hard to gauge the relative importance of each factor. What\u2019s 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,\u201d he said.<\/p>\n\n\n\n

\u201cThere\u2019s a global phenomenon at play, with currencies depreciating against the dollar across the board. However, there\u2019s also a domestic factor tied to worsening fiscal expectations in the short, medium, and long term,\u201d Mr. Sichel added.<\/p>\n\n\n\n

The economist also suggested that seasonal pressures could be affecting the currency market but emphasized that other local assets are also underperforming. \u201cThere\u2019s a broader environment of asset deterioration, reflecting weaker fundamentals, such as worsening inflation expectations in the Focus report,\u201d Mr. Sichel explained.<\/p>\n\n\n\n

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%).<\/p>\n\n\n\n

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.<\/p>\n\n\n\n

Despite the Ibovespa\u2019s 3.9% decline so far this month, Welliam Wang, equity manager at AZ Quest, highlighted the index\u2019s 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. \u201cWhen we look at the small-cap index, we see a steeper decline because it\u2019s tied to more domestically focused stocks. The Ibovespa\u2019s composition helps mitigate volatility,\u201d Mr. Wang concluded.<\/p>\n\n\n\n

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. \u201cThe current race is between \u2018circuit breakers\u2019 on one side and a poor technical environment dragging down fundamentals on the other,\u201d he said.<\/p>\n\n\n\n

*By\u00a0Arthur Cagliari,\u00a0Bruna Furlani,\u00a0Gabriel Caldeira,\u00a0Gabriel Roca,\u00a0Maria Fernanda Salinet\u00a0e\u00a0Victor Rezende \u00a0\u2014 S\u00e3o Paulo<\/p>\n\n\n\n

Source: Valor International<\/p>\n\n\n\n

\nhttps:\/\/valorinternational.globo.com\/\n<\/div><\/figure>\n","protected":false},"excerpt":{"rendered":"

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\u2019s markets during Wednesday\u2019s session. No asset was spared. The exchange rate […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8106],"tags":[25733,25734],"class_list":["post-92271","post","type-post","status-publish","format-standard","hentry","category-murray-news","tag-credibility-crisis","tag-triggers-new-sell-off-of-brazilian-assets"],"yoast_head":"\nCredibility crisis triggers new sell-off of Brazilian assets - Murray Advogados<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murray.adv.br\/en\/credibility-crisis-triggers-new-sell-off-of-brazilian-assets\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Credibility crisis triggers new sell-off of Brazilian assets - Murray Advogados\" \/>\n<meta property=\"og:description\" content=\"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\u2019s markets during Wednesday\u2019s session. 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