- Commodities account for more than half of nation’s exports
- Oil producer Petrobras follows slump in crude prices
Brazil’s real and stocks dropped after Moody’s Investors Service said that weakness in commodities will weigh on the credit outlook for Latin America’s largest economy.
The real slid on Monday and the benchmark Ibovespa fell as raw materials, which make up more than half of Brazil’s exports, retreated the most in three weeks. Producers account for 22 percent of the equity index’s weighting.
Traders have pushed up the value of Brazilian assets this year on optimism that Acting President Michel Temer will succeed in pulling the nation out of a recession and avoid further rating downgrades. Moody’s, which cut the country’s grade to junk last year, said that credit conditions will remain weak in Brazil until 2017 amid economic and political uncertainties. While prices for raw materials have rebounded slightly this year, they are trading at about half their 2011 high.
"It’s still a very complicated scenario for Brazil," said Pedro Galdi, a partner at the equity research firm Upside Investor in Sao Paulo. "Raw-materials have gained a little, but prices are still low, which creates a lot of uncertainties for producers."
The Ibovespa fell 1 percent to 56,755.76 on Monday as 32 of its 59 stocks dropped. The Bloomberg Commodity Index fell 1.6 percent. State-controlled oil producer Petroleo Brasileiro SA contributed the most to the Ibovespa’s decline.
The real lost 0.5 percent to 3.2655 per dollar as the central bank intervened to weaken the currency by offering 10,000 reverse swaps contracts, equivalent to buying $500 million in the futures market. Policy makers are trying to keep a lid on the rally in the real, which has gained 21 percent this year. Concern that the currency’s advance would hamper exports has led the central bank to sell $52.3 billion of reverse swaps to stem gains.
"This is the moment for the central bank to unwind the large swaps stock it has," said Georgette Boele, a currency and commodity strategist at ABN Amro Bank NV in Amsterdam. "Weaker sentiment in emerging markets amid lower commodities also play a role today."
Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rates, fell 0.03 percentage point to 12.80 percent.