Ongoing struggles for Brazilian stocks and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) are inviting increasingly bearish wagers on the downtrodden Latin American market.
Short interest in EWZ “was at 34.3 percent of shares outstanding as of Tuesday, according to data compiled by London-based Markit and Bloomberg. That’s the highest since at least 2006. The benchmark stock gauge slumped to a six-month low,” reports Andressa Lelli for Bloomberg.
EWZ, the largest exchange traded fund tracking stocks in Latin America’s largest economy, slumped to its lowest levels in 10 years Wednesday after Moody’s Investor’s Service downgraded Brazil’s sovereign credit rating to Baa3, the ratings agency’s lowest investment on Tuesday.
Last month, Standard & Poor’s pared its outlook on Brazil’s rating to negative from stable. S&P did not shy away from noting that could lower Brazil’s sovereign debt rating to junk territory. The ratings agency currently rates Brazilian debt BBB-, the lowest investment grade.
In February, Moody’s downgraded debt issued by Petrobras (NYSE: PBR) to Ba2, two levels below investment grade, stoking speculation regarding Brazil’s sovereign credit rating. Slack GDP estimates and a tumbling real are among the downside catalysts pressuring Brazilian stocks and EWZ. Brazil’s planning ministry attributes a major portion of the turn to the projected depreciation of about 21% in the real currency against the U.S. dollar. [Brazil ETF Slides, Bleeds Assets]
“With Brazil’s real leading losses among major global currencies this year, international investors in the Ibovespa are feeling the pinch even as stocks hold up in local-currency terms. The stock gauge has plunged 26 percent this year in dollar terms, the most among the world’s biggest equity markets. That compares with a 3.3 percent decline in reais,” according to Bloomberg.