Ibovespa Falls From Three-Week High as Vale Follows Commodities

  • Iron-ore miner was the worst performer among Brazilian stocks
  • Correlation between raw-materials prices and equity index rise

Brazil’s Ibovespa slumped from a three-week high as raw-materials ended their weeklong advance on rekindled investor caution regarding the outlook for global growth.

Eight of the 10 worst performers of the Brazilian equity gauge were related to the commodity sector, including iron-ore miner Vale SA. State-owned oil producer Petroleo Brasileiro SA, which is known as Petrobras, fell for the first time in three days. Both crude and metals dropped.

With materials making up for 46 percent of the country’s exports and producers accounting for about 22 percent of the equity gauge’s weighting, the correlation between the Ibovespa and the Bloomberg Commodity Index has risen again in June. It had declined in mid-May as the attentions turned to local politics while Vice President Michel Temer replaced Dilma Rousseff as the nation’s leader and started building a cabinet. The measure is now close to the highest since 2011, as uncertainties regarding the Brazilian government have ebbed.

"Politics may stand out as the market’s main concern during short periods of time, when there are too many doubts about where the government is heading to and volatility increases," Adeodato Volpi Netto, head of capital markets at Eleven Financial Research, said from Sao Paulo. "But commodities in fact matter the most for Brazil."

The Ibovespa fell 1 percent to 51,118.46 at the close of trading in Sao Paulo as 41 of its 59 stocks retreated. Vale’s voting shares lost 7.7 percent, the worst performance on the gauge, and Petrobras dropped 2.2 percent. The commodity index ended its longest run of gains since March.

Brazil’s benchmark equity gauge was the world’s winner in the first four months of the year on speculation that a new administration would be able to get support to measures aimed at pulling the country out of its worst recession in more than a century. Since he took office, Temer has appointed names for the economic team that are seen as more market-friendly and signaled the intention to cut spending and to reform the pension and labor system.

The Senate on Tuesday approved the nomination of former Itau Unibanco Holding SA chief economist Ilan Goldfajn to assume the top post at the central bank. Lawmakers also passed on Wednesday a constitutional amendment that grants Temer more flexibility in using tax revenues.

Rousseff, who was re-elected for a second term as president in 2014, stepped down temporarily as she faces a Senate trial for allegedly breaking budget laws. But nobody thinks that she will return, according to Volpi Netto.

"That’s not a reason for concern," the analyst said by phone. "What’s really important is that Temer is making some progress."

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