Brazil’s Ibovespa stock index plunges 3%, falls to 110,000 points; dollar rises, hits R$5.42

RIO DE JANEIRO, BRAZIL – After a slight respite on Monday’s trading session, Ibovespa fell again on Tuesday, September 28. The main index of the B3 followed the pessimistic scenario in the United States, with investors concerned about the rise in inflation and a potential interest rate hike ahead of schedule.

Amid the already negative external scenario, the Ibovespa deepened its losses with the news of a potential extension of the emergency aid payments. The index closed the day down 3.05%, at 110,123 points. In the day’s minimum, Ibovespa fell below the 110,000-point mark.

The negative sentiment in international markets was triggered by Federal Reserve (Fed) president Jerome Powell’s address to U.S. congressmen about the generalized rise in prices.

Powell, who before considered inflation to be only transitory, changed his discourse and now states that the rise in prices is more lasting than expected. For the market, the signal is that the Fed may raise interest rates earlier than expected, thereby undermining riskier investment options, such as equities.

Previously, the forecast was for an interest rate hike only in 2023, but at the last monetary policy meeting, internal support grew for an adjustment as early as 2022. Until then, the American central bank should gradually reduce its monthly injection of US$120 billion through bond buybacks – a process known as tapering.

Concerns have spilled over to the U.S. yield curve. Yields on 10-year bonds reached a 3-month high, surpassing 1.558% at the day’s maximum.

With the increased appeal of bonds, considered to be the safest in the world, the dollar rose worldwide. The American currency increased 0.89% against the Brazilian real to R$5.42, its highest level since May 4. The Dxy index, which measures the variation of the dollar against a basket of strong currencies (such as the euro and pound sterling), rose 0.38%.

With higher interest rates, shares of capital-intensive companies with longer growth perspectives, such as technology, are the most affected. In the American market, the Nasdaq index, with the highest weight in the sector, once again performed worst against the S&P 500 and the Dow Jones, more linked to the traditional economy.

Nasdaq closed the day down 2.83% – the biggest drop since March – while the S&P 500 and Nasdaq fell 2.04% and 1.63%, respectively.

In Brazil, investors again showed concern over the fiscal scenario. In a speech on Tuesday, President Jair Bolsonaro said that Brazil is a wealthy country and can serve “the most needy for longer,” in an indication that the federal government may once again extend the emergency aid paid since the outbreak of the Covid-19 pandemic.

According to Bloomberg, the government is currently considering extending the emergency aid until April 2022.

According to analysts, the prospect adds to the uncertainty of investing in Brazil, as there is no room in the budget for new spending without revenue counterparts. Moreover, the signal suggests that the government is struggling to fund “Auxílio Brasil” (Brazil Aid), a new cash transfer program that would replace “Bolsa Família” (Family Grant).

STOCK MARKET HIGHLIGHTS

The Brazilian stock market followed in the footsteps of the American and penalized more heavily the shares linked to technology and intensive financing. Inter (BIDI11/BIDI4) shares fell 11.82% and 11.70%, leading the day’s declines.

The drop was followed by shares of another fintech, Méliuz (CASH3), down 8.65%, while Pan Bank (BPAN4) fell 4.39%. Still in the sector, Locaweb (LWSA3) and Totvs (TOTS3) lost 4.65% and 3.45%, respectively.

Shares of e-commerce companies were also on the negative side of the index, with Americanas (AMER3) and Magazine Luiza (MGLU3) dropping 6.2% and 5.53%, respectively. Petz (PETZ3), with great growth expectations embedded in the price, tumbled 5.89%.

Among the biggest drops were also the shares of Hapvida (HAPV3) and NotreDame Intermádica (GNDI3), down 5.74% and 5.88%, respectively, after the federal competition regulatory agency CADE issued a note classifying the potential merger between the companies as ‘complex’.

The antitrust agency fears that the deal will generate regional concentration in the health care market and requested additional information to further analyze the deal.

Among the shares with the highest weight in the index, Vale (VALE3) fell 5.01%, pushing Ibovespa down. Shares were affected by the drop in the price of iron ore, down 6.08% to US$112.06 per ton. Steelmakers were also impacted, with CSN (CSNA3) dropping 7.84%.

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