Brazilian Stock Market Index over 100,000 Points for 12th Time. Is Trend Here to Stay?

RIO DE JANEIRO, BRAZIL – The IBOVESPA share index once again closed at over 100,000 points on Tuesday, October 20th. But the celebration was not even close to last year’s June when the main B3 index closed over this threshold for the first time.

This is because, in addition to this being the 12th time that the Brazilian market reaches the mark, the outlook is hazier than it was just over a year ago. Although investment banks and brokerage houses still believe that the IBOVESPA will close the year above 100,000 points, there are major challenges ahead.

In the very short term, the prospect of Republicans and Democrats reaching an agreement on a stimulus package before the American elections – which prompted the index to return to 100,000 points – may also be a reason for pessimism should it not materialize. On Tuesday, House Speaker Nancy Pelosi, who is handling negotiations with Treasury Secretary Steven Mnuchin, retreated on the deadline for the agreement, which may prolong the debate for some time.

Although she said on Sunday that Tuesday would be the deadline for an agreement on the stimulus, in an interview with Bloomberg she said it would only be the last day to set out the terms and move on to the next stage. “Legislation takes time,” she said.

But in addition to the deadlock over the stimulus, the markets still need to address the uncertainties of the U.S. elections with the largest number of postal votes in history. Behind the voter intention polls, current President Donald Trump has already signaled that he may challenge the results should he not win. In this scenario, investors are considering that Trump’s overwhelming defeat would be best, although they are not fond of the corporate tax plans of Democratic candidate Joe Biden.

“Investors have stopped pressing for a potential victory of Democratic candidate Joe Biden and are better digesting the proposals. Now, the main topic for the coming weeks should be much more on when the result will come out rather than who will win”, says Gustavo Cruz, strategist of RB Investments.

All this could occur concurrently with Brazil’s Q3 balance period and European countries dealing with a second wave of coronavirus.

There has been optimism in recent weeks that quarterly results will exceed market expectations. This has been particularly noticeable with the big banks, which have appreciated sharply in recent trading sessions, hoping for a drop in provisions against default – which has become one of the sector’s greatest threats since the start of the pandemic.

But at least for Bruno Lima, an analyst with Exame Research, there is a good chance that provisions will remain high until 2021. “Real defaults should only emerge next year, given that many credits have been renegotiated,” he comments. If optimism gives way to disappointment after the results are released, the impact on the stocks of big banks may be negative, putting pressure on the IBOVESPA.

But while the Brazilian and American markets are trying to digest the corporate results, the Europeans are still reflecting negatively on the resurgent impact of the pandemic. On the continent, the numbers of infections have reached record levels again, causing most countries to return to isolation measures, to a lesser or greater extent. In Ireland, a lockdown has been reinstated.

“The resurgence of Covid cases in Europe reminded investors that the pandemic is still ongoing and that new rounds of business shutdowns and economic losses are still on the radar,” says Paloma Brum, economist at Toro Investments.

In Brazil, the tax issue has switched to silent mode, but it is still present on the radar. Despite recent indications by Chamber President Rodrigo Maia and Economy Minister Paulo Guedes on compliance with the spending cap, discussions on the ‘Renda Cidadã’ (Citizen Income) proposal should unearth the issue after the municipal elections.

As for reforms, the market believes they are virtually impossible to pass before the end of December “I had hoped that the tax would pass through the House later this year. But at most it should pass through the Joint Committee, which would not be enough to boost the stock market. There were very few positive incentives left in Brazil”, comments Cruz.

On the other hand, progress in trials of the most promising vaccines may be the main stock market driver in the last weeks of the year, according to Cruz. “Everything stops in December. Then it will be possible to focus exclusively on news about the vaccine – that is if the American elections are resolved.”

Among the candidates for the vaccine, there are several on the market’s radar, such as those being developed by AstraZeneca/Oxford, Pfizer/BioNtech, Moderna, J&J, and others. However, not all are perceived as having the same positive potential for the stock markets.

“I don’t see the Russian vaccine priced, for instance, because it hasn’t undergone a rigorous screening by regulatory agencies. But as for the Chinese vaccine, everything suggests that it is passing trial points and winning the investors’ confidence,” says Henrique Esteter, Guide analyst. “The positive triggers are much more linked to risk reduction than anything else.”

But while there is some optimism on the prospect of an end-of-year rally and on the IBOVESPA closing 2020 above 100.000 points.

Igor Graminhani, graphic analyst of Genial Investments, says that there is not much to celebrate yet. “The IBOVESPA has not yet started in a rising trend. The short-term trend is still downward, although it is an upward trend in the medium term. The 100.000 points, by being a round number, the market will eventually register, but it is not necessarily a resistance point. The challenge now is to break the 102,330 points.”

Source: Exame