RIO DE JANEIRO BRAZIL – Obstacles to share price increases were many and the last one was rumors of Banco do Brasil’s CEO resignation. Locally, investors will start March still with no definition on emergency aid, whether with or without spending cuts as a counterpart.
Externally, the perception of inflation in the USA is contributing to the market raising the interest rate rule. And on the corporate front, there was nothing left for anyone, with Bolsonaro appointing a general to take over Petrobras while truckers pressured against fuel price hikes.
Instead, there was too little vaccination for disease curves rising too much, quarantine reinstatements and stifled economic activity, emergency aid knocking on the door of fiscal risk, the appointment of a general to head Petrobras.
In addition, inflation in the United States increasingly affects projections, causing the yield on public bonds there to skyrocket, while the Federal Reserve (Fed, the American central bank) is still trying, without much success, to cool things down.
The rumor that Banco do Brasil’s CEO André Brandão had resigned shook the Brazilian market, particularly toward the end of the last trading session. Following the example of Roberto Castello Branco, who resigned from Petrobras, he had been estranged from President Jair Bolsonaro. Concerns that the interference in the oil company would be repeated in the bank are said to have been the last straw. (After the close of trading, Banco do Brasil formally denied Brandão had resigned.)
With all this in the background, the IBOVESPA closed February with accumulated losses of 4.37%, at 110,035 points. On Friday, February 26th, it dropped 1.98%.
The pace of the index in the midst of all this was similar to January. In the very first week, it shook off last month’s losses and accumulated gains. Then it began to tumble downhill, pushed by reality shocks.
But, although the presidential rhetoric has stubbornly persisted, the second wave of the covid-19 has been with us since the turn of the year. Although more than 1,000 Brazilians dying every day could not lead the government to concede the need to help the poorest, it was only a matter of time before political calculation, if not reality, would impose its own demands. After all, 2022 is just around the corner.
While the president’s popularity was slipping, data from services and retail showed the obvious. Without aid, the Brazilian economy lost traction.
President Jair Bolsonaro and Economy Minister Paulo Guedes then changed their discourse. They began to acknowledge the urgency of the moment. And the presidents of the Chamber, Arthur Lira, and the Senate, Rodrigo Pacheco, switched their pre-election rhetoric of fiscal responsibility above all else for social responsibility above all others, without permanently upsetting public accounts, but only if possible.
Things have even headed toward a middle ground. The emergency PEC (proposed amendment to the constitution), on the agenda since 2019, was pulled out of the government’s hat and its base in Congress. The bill to create triggers to cut spending when the noose tightens around the federal budget’s neck was pulled out of the drawer. It was disguised as a counterpart to the reinstatement of aid payments.
And then Friday comes, which marks the end of the month, still with no vote on the PEC. And the news points to the risk of a compartmentalization of the text. If pressure from a number of senators persists, the release of aid payments would be voted on first. This would permit bypassing the constitutional cap, freeing the government from committing a crime of accountability (impeachable), without inflating the debt trajectory. Meanwhile, the automatic spending cuts while neglecting priorities would be left until a consensus is reached. If it ever is.
According to Novus Capital’s manager, Rodrigo Galindo, what we have before us is a kind of pure Brazil entertainment. In the Senate, particularly, the traditional hard game in search of some political favoritism to see the government’s plans come to fruition. But he is optimistic about the prospects of fiscal risk cooling off from here on out. “We may still see some pressure in the Senate to get ministries in return, that sort of thing,” he says. “It will be heated, but at the end of the day, it’s that old Brazil, which heats up, but then it blows over.”
Apart from these uncertainties that have made foreigners ignore the discount offered for stocks in Brazil since last year, the climate abroad is not the most favorable for taking risks in the stock market.
In short, inflation projections in the United States have led investors to demand a higher premium to buy government bonds. They expect the Federal Reserve will soon pull its interest rates up from zero, in order to control a rise in prices driven by the incentives to consumption that have already been and will still be provided. Therefore, they are also raising long-term benchmark rate prospects.
“This week’s stronger rise in US futures rates happened because there was a Treasury auction there with little demand, so there was a certain panic,” Galindo explains. The manager alerts that, although this stress forces a similar degree of execution in the stock markets, it bodes well. After all, if inflation comes, it will be a sign of resumed growth in the world’s largest economy. “It’s part of the accommodation; I work with a scenario that things will progress well, based on an economic recovery cycle as vaccination takes effect in the world.”
This adjustment movement in American interest rate expectations, with the potential to be reflected in other countries’ monetary policy, has repercussions in Brazil too. Apart from the search for protection due to local uncertainties that heats up demand and the price of the American currency, it becomes scarcer in the country. It is ultimately attracted back to the United States by the rising yields on public bonds.
On Friday, the spot dollar became 1.67% more expensive, selling at R$5.6047 at closing. Throughout February, the real accumulated a 2.45% depreciation against the US currency.
This influence is not limited to the exchange rate. On Friday, for instance, the projection for the SELIC rate at 3.5% a year by the end of 2021 was raised to no less than 5% a year by Itaú bank.
The shorter end of the curve of future national interest rates is already indicating this adjustment trend to the American interest rate route, confirming the scenario of a 0.5 point increase, to 2.5% per year, as early as the next Central Bank meeting in March.
The interbank transactions (DI) rates for January 2022 rose in this trading session from 3.63% to 3.74%. They accurately reflect more immediate expectations for the SELIC. The end of the curve is more linked to the intensity of the scent of a government default in the air and, consequently, to the expectation of interest rates in line with this risk ahead. And the rates for January 2031 locked at 8.50%.
IBOVESPA highlight
In parallel, Petrobras was the great corporate highlight in the national market, responsible for an important part of IBOVESPA’s decline in February. It experienced the largest meltdown in Brazil’s most famous theoretical portfolio of 81 stocks.
The worst hit were the common shares (ON, which grant voting rights in meetings) of the majority state-owned company, with accumulated losses of 18.95%. Preferred shares (PN, which give priority in dividends) fell 16.67% in the same period. This meltdown happened against the backdrop of an 18% rally of the most traded oil contracts in London, (Brent, global reference), at US$66 per barrel.
Meanwhile, shares of the private oil company PetroRio, free to fly in line not only with oil, but with the dollar price, had an accumulated appreciation in the month of 18.61%.
Source: Valor Investe