To the surprise of some investors, the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) closed lower Monday, a day after the lower house of Brazil’s congress voted to impeach President Dilma Rousseff.
Ahead of Sunday’s impeachment vote, some traders made bearish bets against the largest exchange traded fund tracking equities in Latin America’s largest economy. Entering Monday, EWZ was one of this year’s best-performing single-country emerging markets ETFs with a gain of more than 43%.
The Brazilian rally went into high gear after former President Luiz Inacio Lula da Silva was detained, adding to speculation that support will grow to impeach his successor, President Dilma Rousseff. Amid intensifying protests, some market observers believe Rousseff’s days in power are numbered. However, doubters remain.
Coming into this year, traders were ditching Brazilian stocks and the relevant ETFs as Rousseff failed to stimulate the economy prevent credit downgrades. Now some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade. However, Brazilian assets became more appealing this year thanks to the weaker dollar, stronger commodities prices and a spate of bad news for Rousseff.
[related_stories]Previously, bad news for Rousseff has usually meant good news for EWZ, but that was not the case on Monday. Some traders were prepared for that with some arguing that Rousseff’s situation is so dire that markets priced in the fact that congress would push her impeachment forward.
“Bearish bets on Brazil’s biggest exchange-traded fund rose in the run-up to the lower house’s April 17 vote to impeach President Dilma Rousseff. The fund had surged this year on bets that government change would stem the country’s economic malaise, then dropped Monday even after the ballot came out in favor of approving her ouster. The surge in short interest before the vote was an indication that traders see the impeachment as a complicated process, said James Gulbrandsen, the chief investment officer for Latin America at NCH Capital in Rio de Janeiro,” reports Denyse Godoy for Bloomberg.
Last week, investors added about $94 million to EWZ ahead of the impeachment vote. The impeachment proceedings now move to the senate there, where only a majority is needed to impeach Rousseff.
iShares MSCI Brazil Capped ETF
