Brazilian stocks and the related exchange traded funds, including the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ), rallied Thursday after the country’s central bank slashed interest rates by 100 basis points.
EWZ, the largest ETFs tracking stocks in Latin America’s largest economy, is up nearly 8% over the past month, extending its year-to-date gains to 26%. That after Brazilian stocks contended with a spate of political volatility.
Earlier this year, federal police carried out search and arrest warrants throughout the capital in response to O Globo reports on leaked testimony indicating that Temer approved payoffs to acquire the silence of Eduardo Cunha, the man behind last year’s ouster of former president Dilma Rousseff. Recently, Brazilian President Michel Temer survived an effort to suspend him on corruption allegations.
Brazil’s central bank has not hiked interest rates since last year. Brazilian stocks have rallied this year and banks in Latin America’s largest economy appear inexpensive, those institutions are faced with declining consumer credit quality. Additionally, some Brazilian states have recently delayed payment to public workers, potentially crimping the ability of those workers to repay loans taken from Brazilian banks. The central bank’s efforts to engage in monetary easing are widely seen as a positive catalyst for Brazilian stocks. As recently as early 2016, Brazil’s benchmark interest rate was around 13%. It is now 8.25%.
“The monetary policy committee sees ‘a moderate reduction of the pace of easing as appropriate,’ given the outlook for the economy, the bank said in the statement announcing the rate cut. ‘In addition, under those same circumstances, the (committee) foresees a gradual ending to the cycle,’” reports MarketWatch.