The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) slumped more than 7% last week and familiar catalyst, that being Brazilian politics and a wide-ranging corruption probe, hampered EWZ and Brazilian stocks.
Brazilian assets have been under pressure as a corruption scandal at state-run oil giant Petroleo Brasileiro impeded government efforts to curb a rising budget deficit and slow inflation. The troubles also dragged on the Brazilian real currency, the world’s worst-performing major currency this year after touching a record low of 4.25 per dollar back in September.
“Federal police in Brazil arrested the leader of Rousseff‘s government in the senate, and the chief executive of bank BTG Pactual, on allegations of obstruction of justice. An anonymous Rousseff aide told Reuters, the arrest of Rousseff’s leader in the Senate “felt like a nuclear bomb here in the presidential palace. Unfortunately the political crisis deepens further and complicates our agenda in Congress,’” reports Demitra DeFotis for Barron’s.
“A Reuters review of a 2009 federal investigation of Petrobras, and interviews with those who conducted it, indicates Rousseff missed opportunities to stop the graft before it erupted into a crisis so big it could push Brazil’s slow-growing economy back into recession next year,” Reuters reported. Rousseff served as Petrobras chairwoman from 2003 to 2011. [Giving up on Brazil ETFs]
“Moody’s kept a negative outlook on the state-controlled oil producer’s rating after lowering it to Ba2, two levels below investment grade, on Tuesday. The downgrade marks the second reduction by Moody’s in less than a month for the company. Fitch Ratings and Standard & Poor’s rank the company at their lowest levels of investment grade,” report Filipe Pacheco and Sabrina Valle for Bloomberg.
In September,Standard & Poor’s stripped Brazil of its investment-grade credit rating and some market observers believe further credit downgrades for the country are possible, perhaps in the near-term.
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]
Brazil’s real is in a wicked slump against against the dollar and resides at multi-year lows against the greenback. The real could face increasing pressure as global investors price in the rising odds of additional credit downgrades for Brazil. [Bad News for Brazil ETFs]
iShares MSCI Brazil Capped ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.