- Equity benchmark posts longest advance since August 2014
- Itau, Bradesco and Petrobras contribute most to rally
Brazil’s stocks capped their longest rally in 13 months and the real gained as speculation that the Federal Reserve will keep interest rates lower for longer bolstered riskier assets.
The equity benchmark rose for a fifth day as signs of weakness in the U.S. economy spurred bets that policy makers will defer removing stimulus that’s helped propel emerging-market assets higher. Lenders Itau Unibanco Holding SA and Banco Bradesco SA contributed the most to the gauge’s increase. Oil producer Petroleo Brasileiro SA climbed with crude. The real extended a two-day rally.
Traders turned bearish on Brazil, sending the Ibovespa into a bear market in August, on forecasts Latin America’s largest economy will post the longest recession since the 1930s amid a widening corruption scandal. The slide accelerated, bringing its valuation to the lowest since January, on concern the Fed would raise borrowing costs at a time when the Chinese economy is faltering.
“A Fed delay would be very positive right now,” Fernando Heller, the chief executive officer at brokerage TOV Corretora, said from Sao Paulo. “Plus, Brazilian stocks are so cheap. That helps with the overall mood.”
The equity benchmark increased 1.2 percent to 47,598.07 at the close of trading in Sao Paulo. The Ibovespa is still trading at 11.2 times estimated earnings, or 18 percent below the valuation for a gauge of Latin American stocks. The real added 0.5 percent to 3.9114 per dollar.
The odds of Fed liftoff this month fell to 10 percent after U.S. reports showed the pace of hiring slowed in September and wage growth stalled. As a result, the dollar weakened, fueling demand for emerging-market assets and commodities.
Raw-material companies in the MSCI Brazil index climbed 3.6 percent as Vale SA, the world’s largest iron-ore producer, extended a five-day advance.
The external outlook pushed the currency and stocks higher even as local economists raised their estimates for inflation and forecast a bigger contraction for the economy this year. The real is still down 32 percent since December, the worst performance among major currencies.
"The environment for emerging-market currencies such as the real is more positive as the possibility of a Fed rate rise this year vanishes," said Georgette Boele, a strategist at ABN Amro Bank NV in Amsterdam. "But gains are poised to be short lived on the Brazilian political uncertainty combined with weak fundamentals and high inflation."
A cabinet reform announced by President Dilma Rousseff Friday also contributed to the advance in Brazilian assets as it may help the government get approval on measures to trim a budget deficit, according to Rafael Ohmachi, an analyst at brokerage Guide Investimentos.
Former President Luiz Inacio Lula da Silva, who remains influential in Brazil’s governing party, is said to be unsatisfied with economic policy and some ministers even after last week’s cabinet reshuffle, according to newspapers Valor Economico and O Estado de S. Paulo. Lula is especially critical of Finance Minister Joaquim Levy, who he says is failing to generate the confidence needed for the country to resume growth, according to the papers, which cited unidentified people close to Rousseff.
She’s facing record low popularity and calls for her impeachment as her government struggles to tame a budget deficit and avoid another credit-rating downgrade after Standard & Poor’s cut the country to junk last month.
Brazil’s 2016 budget must bring confidence to investors, Levy said in an event in Rio de Janeiro on Monday. Once fiscal issues are solved, growth will return, he said.
The Lower House head Eduardo Cunha, a member of a party that’s loosely allied with Rousseff’s, will continue analyzing impeachment requests this week. As part of last week’s cabinet shakeup, Rousseff is giving members of his party authority over seven ministries, essentially ceding greater control of her government in a bid to bolster support among allies and fend off the threats of an impeachment.
"Trading in the real remains pressured in the short term, with all the negative news flow on the political front and the uncertainties regarding what might come next," Reginaldo Siaca, a currency manager at TOV Corretora de Cambio, said from Sao Paulo. "It will be hard for the currency to recover and sustain a level below 4.0 per dollar. People are skeptical."