Standout Earnings Can’t Overcome Bearish View on Brazil’s Stocks

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Vale SA to Banco Bradesco SA’s earnings surprises weren’t able to lift the Ibovespa as traders expect Latin America’s largest economy to slow further.

The benchmark equity gauge led losses in the Americas after the central bank lifted interest rates for a seventh straight time even with the nation set for the worst recession in 25 years. While Brazil’s earnings season got off to a good start, with most companies beating analysts’ estimates, traders say the economic malaise is hindering stock gains.

“Those companies are the exceptions,” Roberto Indech, an analyst at brokerage Rico Corretora, said in a phone interview from Sao Paulo. “The economic slump makes us all expect very weak corporate results for the second quarter.”

Brazilian stocks have fallen 14 percent from this year’s high in May amid speculation that earnings will falter as above-target inflation slows down consumer purchases and a surge in borrowing costs makes financing more expensive. President Dilma Rousseff has struggled to revive growth and keep the nation’s investment-grade credit rating amid a widening bribery probe at the state-controlled oil company.

The Ibovespa dropped 0.7 percent to 49,897.40 at the close of trading in Sao Paulo, bringing this month’s slump to 6 percent. The real fell to a 12-year low, and swap rates slid.

With Brazil’s consumer prices running at more than double the official target, policy makers chose to maintain the pace of rate increases on Wednesday amid a looming recession. While the central bank signaled borrowing costs are high enough to slow inflation toward its target, policy makers raised the Selic to an eight-year high of 14.25 percent.

‘Very Expensive’

“It’s just been very expensive for both companies and individuals to get any sort of financing in Brazil,” Pedro Paulo Silveira, the chief economist at brokerage TOV Corretora. “That has contributed to the economic deceleration.”

Eight out of the 10 groups in the MSCI Brazil index retreated on Thursday, with financial shares extending this year’s plunge to 25 percent.

Bradesco, Latin America’s second-biggest bank by market value, slumped 2 percent even after reporting earnings that beat estimates as lending margins rose and the firm cut costs.

Vale’s efforts to shore up its balance sheet in response to falling commodity prices helped the world’s biggest iron-ore producer beat most analysts’ earnings estimates. Brazil’s biggest exporter is reducing investments, selling stakes in assets, halting unprofitable projects and swapping sales of lower-quality ore for higher-margin products. Still, the shares fell after a two-day rally.

Embraer’s Sales

Planemaker Embraer SA dropped the most since 2013 after reporting sales that missed analysts’ estimates.

Education companies tumbled after Reuters reported that the government is planning to further cut spending in the industry by as much as 2 billion reais ($593 million). Kroton Educacional SA sank to the lowest since March, while Estacio Participacoes SA extended a three-day slide to 13 percent.

Trading volume of equities in Sao Paulo was 6.2 billion reais, according to data compiled by Bloomberg. That compares with a daily average of 6.72 billion reais this year, exchange data show.