This year’s price action in Brazilian equities, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and rival Brazil exchange traded funds has been easy to explain.
Investors bid those securities on news that shows waning support for President Dilma Rousseff ahead of Brazil’s Oct. 5 national elections. Conversely, positive polling data for Rousseff proves problematic for Brazil bulls. That much is on full display Monday as EWZ is the worst non-leveraged ETF to this point in the trading day with a loss of nearly 5% on volume that appears poised to easily top the three-month daily average of almost 19.6 million shares.
The negative catalyst is easy to spot: The most recent Datafolha polls shows Rousseff’s lead over challenger Marina Silva widening. Rousseff now leads Silva 47% to 43%. “Rousseff’s also gained in first round intentions, rising to 40 percent from 37 percent a week earlier increasing her chances she could win outright without a second round. Silva’s first-round support fell to 27 percent from 30 percent,” reports Reuters.
Under Brazilian law, a runoff can only be averted if one of the three candidates running captures more than 50% of the vote on Oct. 5. The runoff, if needed, would take place on Oct. 26.
When accounting for Monday’s tumble, EWZ is now off 18.5% this month, putting the largest Brazil ETF dangerously close to the 20% decline from its early September peak necessary to qualify the fund for the ominous bear market distinction. On Sept. 3, EWZ touched $54. Today, the ETF will have to work to close above $44. [Brazil ETF Flirts With New Bear Market]
Pressuring EWZ today is Petrobras (NYSE: PBR). Shares of Brazil’s state-run oil giant, which have shown an intimate sensitivity to polling data, are lower by 10.3% today on volume that has already eclipsed the daily average.
Two Petrobras securities combine for over 12% of EWZ’s weight, not a good thing when considering that with today’s slide, the stock is down more than 30% just this month. Since Rousseff took office on Jan. 1, 2011, Petrobras has been the worst-performing major large-cap oil stock with a U.S. listing. Even BP (NYSE: BP), which had to contend with the aftermath of the largest oil spill in U.S. history, has outperformed its Brazilian rival over that time. [Long Brazil, Short Rousseff Needs to Work]
So sensitive are Brazilian stocks to the specter of Rousseff winning another term that of the 10 worst-performing non-leveraged ETFs Monday, four, including EWZ are Brazil ETFs. Two others, the iShares Latin American 40 ETF (NYSEArca: ILF) and the Guggenheim BRIC ETF (NYSEArca: EEB), have significant Brazil allocations.
iShares MSCI Brazil Capped ETF
Tom Lydon’s clients own shares of EWZ.