Most Brazilian Stocks Advance Amid Bets for Lower Interest Rates

  • Interest-rate swaps drop after dovish central bank minutes
  • Gloomy retail sales, slowing inflation may make room for cuts

Most Brazilian stocks gained as evidence piled up that the central bank may be considering cutting borrowing costs sooner than previously thought. Swap rates slumped.

The Ibovespa is up 21 percent in dollar terms this year, the best performance among 93 stock gauges. Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, declined to an almost seven-month low. The real, trading little changed for the day, is leading gains among world’s major currencies in 2016.

Stocks rallied after Brazil’s central bank said in the minutes of its March 1-2 meeting that while domestic and global uncertainties require further monitoring, it could improve conditions for the convergence of inflation toward the target in 2017. The dovish tone of the statement coupled with a worse-than-expected retail sales report led traders to increase bets that policy makers may have room to cut interest rates. It followed a report showing inflation, currently running at more than twice the central bank’s target, slowed more than forecast in February.

“The market read the minutes searching for signs of the central bank’s willingness to cut interest rates,” said Jason Vieira, the chief economist at Infinity Asset Management in Sao Paulo. "That adds to data about retail sales, which reinforced the view that the Brazilian economy is in really bad shape."

The Ibovespa was little changed at 48,648.52 as of 1:52 p.m. in Sao Paulo, with 35 stocks higher and 26 lower. Swap rates due in January 2017 declined 0.07 percentage point to 13.82 percent.

Traders are betting that a drop in the benchmark interest rate could help revive consumer and corporate spending, while also prompting investors to shift some cash from fixed income back into stocks.

Earlier on Thursday, the real climbed as much as 1.4 percent as the ruling political party was dealt another legal setback, adding to speculation that the change in government that the market is hankering for may be drawing closer.

Investors are becoming more bullish as the outlook for President Dilma Rousseff and her Workers’ Party worsens. She’s fighting off the threat of impeachment while a sweeping corruption scandal looks poised to snare former President Luiz Inacio Lula da Silva, whose name has been tossed around as the party’s leading candidate in the next presidential election.

It’s a stark reversal from the sky-is-falling mood that prevailed in Brazilian markets last year when troves of investors abandoned Latin America’s biggest economy, causing the real to tumble 33 percent and wiping out $62 billion in the market value of the nation’s 100 biggest companies. While the economic outlook and political crisis have only worsened since then, it’s now so bad that many say there’s no way for the current government to survive, according to Infinity’s Vieira.

"The markets have been anticipating the end of this government,” he said from Sao Paulo. “The question now is not whether this administration will fall, but when."

While investors last year were split on whether a complicated and possibly lengthy impeachment would be good or bad, many now say it may be the only way out of the political quagmire that is preventing lawmakers from focusing on closing a crippling budget gap and reviving growth. Economists forecast Brazil’s gross domestic product to shrink 3.3 percent this year on top of a 3.8 percent contraction in 2015, according to estimates compiled by Bloomberg.

On Wednesday, Sao Paulo prosecutors accused Lula of hiding assets from authorities just days after a separate probe unleashed a new round of political turmoil. Lula has denied any wrongdoing. Meanwhile, news reports that the PSDB, the biggest opposition party in Congress, and the PMDB, currently the biggest ally in Rousseff’s ruling coalition, are cooperating to find ways to solve Brazil’s economic and political crisis are fueling bets they could form a new alliance and jointly support impeachment.

“All these accusations against Lula and the closer proximity between PMDB and PSDB could be a a turning point,” said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores, in Curitiba, Brazil. “It could lead to more accelerated policy implementation.”

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