Things are Unbelievably Bad for Brazil ETFs

In what is now an all too familiar theme for Latin America bulls, Brazil exchange traded funds are being punished Friday after J.P. Morgan downgraded its view on the country’s sovereign debt to underweight from market weight.

The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest and most heavily traded ETF tracking Latin America’s largest economy, is off 2.6% and is trading at what appears to be a new 52-week. But wait. There’s more and it is not good news.

At this writing, EWZ currently resides just below $32. To put EWZ at a $32 handle into perspective, that is a price level the ETF never violated on a closing basis during the financial crisis. In fact, it has been nearly 10 years since EWZ closed below $32. [Brazil ETFs Rocked by Petrobras Downgrade]

To be fair, EWZ is far from the only Brazil ETF offender Friday. Of the 31 ETFs that have thus far hit new 52-week lows today, six are Brazil funds. Underscoring the weakness in Latin American equities and ETFs this year, three of today’s other 52-week low ETFs are Latin America single-country funds.

In its downgrade of Brazilian debt, J.P. Morgan cited “risks from macro fundamentals are compounded by uncertainty from the impact on the sovereign from Petrobras (NYSE: PBR), which will likely lead to wider spreads versus sovereign peers over the coming months,” reports Dimitra DeFotis for Barron’s.

Petrobras, Brazil’s state-controlled oil company and one of EWZ’s largest holdings, has been an albatross on the ETF. J.P. Morgan also lowered its rating on the company’s bonds to neutral, according to Barron’s. That comes after Moody’s Investors Service took its rating on Petrobras bonds to junk status late last month.

A widening corruption probe, one that has ensnared Brazilian President Dilma Rousseff, has sent American depositary receipts of Petrobras lower by nearly 18% this year. Making matters worse is that it is now widely known that Rousseff had ample opportunity to stop graft at Petrobras.