Brazil’s Ibovespa registers lowest closing this year on fears of fiscal risks; dollar up to R$5.57

RIO DE JANEIRO, BRAZIL – With no respite, Ibovespa endured another day of losses and closed Thursday’s session at its lowest closing price in over a year. The day brought no news to encourage investors, quite the opposite – it only heightened concerns with fiscal risks, which have been influencing the market for some time.

Talks around the Court-ordered debt PEC indicate that the text passed in two rounds of voting in the Chamber of Deputies, with no major changes, is likely to undergo radical changes in the Senate, where deputies are considering removing the government’s judicial debts from the spending cap.

Next week, the text to be discussed in the Senate Constitution and Justice Commission (CCJ) should be a hybrid containing amendments suggested by senators that are quite different from what was initially intended.

With the PEC, the government intends to finance the adjustment in the installment of “Auxílio Brasil” (Brazil Aid), the substitute for “Bolsa Família” (Family Grant), by postponing the payment of court-ordered federal debt.

In alternative proposals that reached the rapporteur of the matter, the idea is to pay court-ordered debt, finance Brazil Aid and still not breach the spending cap (because the payment of court debts would be exceptionally accounted for separately).

“From a fiscal standpoint, there are positive aspects in the proposal presented by the three senators. The issue of court-ordered federal debt payments outside the cap would not be bad news for the markets, since the rule would remain untouched and this expense would be handled in an exceptional manner. From the political standpoint, however, there are some significant obstacles,” say Levante Ideia de Investimentos analysts.

The economic team has declared that it does not agree with the alternative proposal and the lack of understanding has again stressed investors.

“The Senate’s demonstrations of not wanting to pass the PEC the way the government wanted is also an indication that other reforms are unlikely to pass in Congress. But if the government shows that it has the strength to pass something “heavier,” there is a prospect that we could have a more productive 2022 and even have an upward revision of the GDP,” explains Frente Corretora chief economist Fabrizio Velloni.

Ibovespa closed down 0.51% at 102.426 points. The traded volume on the day was R$28.4 (US$1.5) billion. It was the index’s lowest closing point since November 6, 2020. Ibovespa futures traded down 0.55% at 103,130 points in the last deals of the day.

Vale’s (VALE3) shares traded the highest volumes of the day and were also among the largest drops of yesterday’s session. Shares closed the day down 4.11% at R$62.33. The company’s performance was pressured by iron ore, whose prices fell to their lowest level in over a year: on the Dalian Stock Exchange in China, the commodity closed down 5.1% at US$80.21 and continues to drop in early trading on Friday.

The commercial dollar again surged in yesterday’s trading and closed up 0.83% at R$5.569 to buy and R$5.570 to sell. The future dollar maturing in December 2021 rose 0.51% to R$ 5.568 near the close.

In the interest rate futures market, the DI for January 2023 rose 14 basis points to 12.16%; DI for January 2025 rose 10 basis points to 12.09%; and the DI for January 2027 rose 6 basis points to 11.96%.

Abroad, concerns over a new Covid-19 wave, with an increase in the number of cases, pressured business. In Europe, where several countries have declared a lockdown for non-vaccinated people, stock markets closed down. The Stoxx 600 index, which comprises the shares of 600 companies in all major sectors in 17 European countries, fell 0.45%.

In the United States, the succession for the presidency of the Federal Reserve has also been cautiously watched by investors. Any signal coming from the American central bank may indicate a change in the pace of the withdrawal of stimulus to the economy or give an idea of when interest rates in the country may rise again.

The Dow Jones closed down 0.17%, at 35,871 points; S&P was up 0.34%, at 4,704 points, the Nasdaq technology exchange was up 0.45%, at 15,993 points.

Oil prices partially recovered from a tumble on the prospect of the U.S. and China triggering reserves to increase supply in the market and lower prices. The Brent barrel, the price of which is the reference for Petrobras, rose 1.13% to US$81.19 and the WTI increased 0.8% to US$78.99.