USDBRL falling and so are stocks
A week or so ago, the focus of the market moved to Italy as political uncertainty took over and sent their bond yields rising, and stock market lower.
That was nothing compared to what is going on in Brazil.
The Brazilian central bank came in today to stem the fall in the Brazilian real (and try to slow a tumble in the stock market as well).
From the January low the USDBRL is up 25.6% (a fall in the BRL). For the year, the BRL is down about 18.5% (see chart above). The high price of the USDBRL reached 3.9657. It is back down to 3.9218 currently, but is still higher on the day.
Meanwhile, the stock market is also on a downward trajectory. The Brazilian ETF in the US (EWZ) is down about 19% for the year currently and was down close to 35% from the year's high, at the low today. That low took the price back down toward the December 2017 lows. The price decline stalled there, but it remains vulnerable.
The catalysts include:
- Labor unrest. There was a recent 10 day truckers strike.
- Fragile economic growth
- Presidential election in October (and political corruption)
- A stronger US dollar (raises borrowing costs and takes investors away from Brazilian debt)
The combination is sending investors toward the exits and the snowball could magnify - especially as the US FOMC embarks on another tightening next week.
Whether it was a direct result, I don't know, but there was a bid back in the US debt today. The 10 year yield is down -5.4 bps at the moment.
Although Italy saw investors sour on bonds, and stocks of their country as a result of the political risk, on a relative basis, that reaction is mild compared to what has been happening in Brazil (and the risks going forward). Be aware. It could begin to snowball even more and that could lead to more flows into safety (like US bonds) and out of risk.
