Already in a long downward spiral, things got worse for the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), the largest exchange traded fund tracking Brazilian stocks, last week when Standard & Poor’s stripped Brazil of its investment-grade credit rating.
EWZ is now down 10% over the past month. Last month, Moody’s Investor’s Service downgraded Brazil’s sovereign credit rating to Baa3, the ratings agency’s lowest investment-grade rating.
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]
Ratings agency punishment and myriad other macro headwinds have plagued EWZ and Brazil again this year, leading to increased volatility for EWZ.
“The implied volatility of the Brazil ETF is near 52-week highs. You will notice the sharp spike in volatility that took place about one year ago around the Brazil elections. The implied volatility index mean, which is a figure determined by the options premiums on EWZ, rests near 50%. A 50% IV means the market expects EWZ to swing 14-15% over the next month. For perspective, the S&P 500 IV (aka “the VIX”) has not been this high since March 2009 (except for the initial print on morning of the most recent flash crash event),” writes Mike Zaccardi for See It Market.