By the looks of the recent price action in Brazil exchange traded funds, financial markets are pricing in the result of Sunday’s runoff election between President Dilma Rousseff and challenger Aecio Neves.
Unfortunately for Brazil bulls, the latest polling data confirms the worst: Rousseff is likely to emerge victorious. According to an Ibope poll released Wednesday, she leads Neves 49% to 41% heading into Sunday’s election and “in a Datafolha poll she had an advantage of six percentage points. Both polls had a margin of error of plus or minus two percentage points,” report Anna Edgerton and Mario Sergio Lima for Bloomberg.
Those are significant gains for Rousseff just over the course of this week. On Monday, MDA’s first poll since the Oct. 5 first round election showed Rousseff with 45.5% of voter support compared to 44.5% Neves. That was enough to make the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and the Market Vectors Brazil Small-Cap ETF (NYSEArca: BRF) two of the worst-performing non-leveraged ETFs on Monday and things have not gotten much better as the week has progressed. [Rousseff Rattles Brazil ETFs]
EWZ, the largest Brazil ETF, sank 3.7% Thursday on more than double the average daily volume. Even with Friday’s gains, EWZ is off 3% this week while BRF has tumbled 3.3%. Options markets provided a tell about those moves. Entering Monday, EWZ’s 30-day implied volatility was pricing in a move of 20% in either direction over the next month for the ETF.[Volatility Ahead for Brazil ETFs]
BRF and EWZ are not the only ETFs that have been dinged by the specter of another term for Rousseff. The WisdomTree Brazilian Real ETF (NYSEArca: BZF) entered Friday on a five-day losing streak.
Brazil ETFs have been sensitive to polling data, prompting some market observers to speculate EWZ and Brazilian stocks would surge if Neves pulls off the upset. Not surprisingly, others have warned that EWZ could face swift repudiation and significant downside if Rousseff wins. [Election Risk/Reward With Brazil ETFs]
There are some signs of hope for Brazil bulls. For example, Neves was left dead heading into the first round election and was able to pull ahead of Marina Silva and advance to the runoff, so he has been down tough roads before.
Second, some investors have not been spooked by this week’s slump in Brazil ETFs. No money has been pulled from BRF and BZF while investors added almost $368 million to EWZ from Monday through Wednesday, indicating some institutional buyers have gotten involved in the ETF.
iShares MSCI Brazil Capped ETF
