Brazil Stocks Rise, Swap Rates Drop on Petrobras Fuel-Price Cut

  • Traders bet central bank may start easing cycle next week
  • Lower borrowing costs seen as boost to country’s recovery plan

Brazilian stocks advanced to the highest level in more than two years and short-term swap rates fell on speculation that the central bank may lower borrowing costs next week after Petroleo Brasileiro SA’s surprise fuel-price cut.

The Ibovespa rose 1.1 percent to 61,767.22 at the close of trading in Sao Paulo as all but 14 of its 58 stocks gained. Swap rates on the contract maturing in December 2016, a gauge of expectations for interest-rate moves, dropped 0.01 percentage point to 13.83 percent, the lowest in two weeks. The real declined 0.9 percent to 3.2062 per dollar, but is still up 0.4 percent this week.

State-controlled oil producer Petrobras, as the Rio de Janeiro-based oil giant is known, announced Friday that gasoline prices will fall 3.2 percent and diesel will drop 2.7 percent at the refinery gate. Its new policy will ensure the fuel prices are more closely aligned with international levels. The cuts reinforce investors’ bets that the central bank will begin an easing cycle next week, with the swaps curve currently pricing in bigger odds of a quarter-point reduction on Oct. 19 and an acceleration to 50 basis points in December.

"I was expecting a cut in fuel prices next year," said Mauricio Oreng, a senior strategist at Rabobank NA in Sao Paulo. "These cuts, which could have an impact on inflation of about 10 basis points in the year, are helping to push swap prices down." He now expects inflation to slow to 7.1 percent this year from 10.67 percent in 2015.

Petrobras’s stock rose 3.2 percent, the second-biggest contribution to the benchmark equity index’s advance. Retailer Cia Brasileira de Distribuicao led gains among companies that depend on domestic demand. Miner Vale SA and steelmaker Gerdau SA followed metals prices higher. 

Brazilian stocks have climbed 76 percent this year in dollar terms and the real has advanced 24 percent, the best performances in the world, on bets that President Michel Temer will be able to win back investor confidence and restore economic growth. Lower interest rates are seen as a boost to the government’s efforts.

Temer replaced impeached Dilma Rousseff in August vowing to trim a budget deficit that cost Brazil its investment grade in 2015 amid the country’s worst recession in a century. On Monday, his administration scored its first big victory on its reforms plan as lawmakers approved a bill to cap growth in public spending.

"All the conditions to ease the monetary policy now are given," Jason Vieira, chief economist at Infinity Asset Management, said from Sao Paulo. "Brazil is certainly going in the right direction."

An MSCI index of energy companies was the best performer among 11 industry groups Friday. Credit-card processor Cielo SA was the worst performer on the Ibovespa after Chief Executive Officer Romulo Dias stepped down.

Before it's here, it's on the Bloomberg Terminal.