Brazilian markets and country-specific exchange traded funds surged as traders looked to Thursday’s precipitous sell-off as a buying opportunity.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) declined jumped 5.9% Friday on close to double its average daily volume after plummeting over 16% in the previous session.
Traders who were betting on a quick turnaround also capitalized on leveraged products, including the two times leveraged ProShares Ultra MSCI Brazil (NYSEArca: UBR), which increased 9.9%, and the three times leveraged Direxion Daily Brazil Bull 3x Shares (NYSEArca: BRZU), which surged 16.0%.
EWZ received its first inflows since April 3 on Thursday, according to Bloomberg.
Many traders also turned to EWZ as the go-to vehicle for Brazilian equity market exposure. According to a BlackRock iShares note, EWZ traded over $5.4 billion in notional value Thursday, making it the biggest single trading day in the fund’s 17-year history. Furthermore, the Brazil ETF traded 18% more in U.S. dollar notional terms than Bovespa Futures when on average the futures traded significantly more than the ETF.
Despite the sudden pullback, money managers from Morgan Stanley to BNP Paribas SA argue that the short-term volatility is not changing their long-term bullish view on Brazil. Morgan Stanley said it remains “constructive” on Brazil due to improvements in the emerging country’s external accounts and the central bank’s ability to minimize volatile moves. BNP Paribas Investment Partners said the “political noise” would not alter its view on Brazil, even if there is an orderly transfer of power in the government.
William Jackson, an emerging-markets economist at Capital Economics, argued that many are betting that Thursday’s selling in Brazilian assets was overdone and the risk of a constitutional crisis was exaggerated.
Brazilian markets and country-specific ETFs declined Thursday as some called for the resignation of President Michel Temer in response to reports of illegal payments to a disgraced lawmaker.
Some market observers believe there is little chance that the government would change or impede the main factors of the past 16-month rally, including improved economic outlook, lower borrowing costs and labor-market reforms.
“People are thinking that it may be premature to abandon Brazil,” Jackson said told Bloomberg. “While the events yesterday came as quite a shock, there’s also the view that they may not have much impact on the economic outlook or the reform agenda.”
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