Brazilian Stock Market Drops Almost 2% After Inflation In June, But Edging Losses: What Explains The Move?

The Ibovespa Index came to work with a huge loss of 1.90%, to 115,703 points, during Tuesday morning (11), even after deflation measured by the Extended Consumer Price Index (IPCA) for June, the first note of negative inflation since then. September 2022, down by 0.08% compared to May.

Despite data pointing to deflation, opening the doors to the beginning of interest rate cuts that would boost the stock exchange, Ibovespa started to suffer heavy losses since, at the opening of the data, a rise of 0.62% in service inflation, after a negative change of 0.06% in May . This is a measure that is closely watched by the central bank.

Thus, if at the end of last week, shortly after the tax reform was approved in the Chamber, there was a larger market segmentation on a 0.25 percentage point cut or 0.5 percentage point cut in August, the bets on a smaller cut came back to prevail, driving up interest rates. In the future.

For XP’s Economics team, in short, the composition of the IPCA and its aggregate metrics promote a “phase one” of inflation in Brazil, driven by food and industrial commodities. However, service metrics continue to rise above the inflation target and reinforce the House’s view that the central bank will cautiously begin the easing cycle with a 0.25 percentage point cut in August, followed by 0.50 percentage point cuts from September, ending the year at 12.0%. “We maintain our forecast of 4.7% for IPCA 2023 and 4.1% for 2024 IPCA,” XP rates.

However, throughout the course of Tuesday afternoon, the number of casualties eased off. At 2:43 pm (Brasilia time), the Ibovespa index was down 0.36%, to 117,521 points. On the other hand, the dollar rose and began to decline by 0.28%, at 4.868 Brazilian reals when buying and 4.869 Brazilian reals when buying.

According to Gustavo Cruz, chief strategist at RB Investimentos, initially, the IPCA reading was centered in the services sector, which accelerated. “But in fact, the indicator was not even bad, it showed a bearish spread, renewed a lower level and was completely in line with market expectations,” he says.

It should also be noted that, as noted by Carla Argenta, Chief Economist at CM Capital, the acceleration in services was due to a seasonal movement. “In the month of June, families organize their holidays, buy airline tickets, travel packages and book hotels. This seasonal movement was largely responsible for the strong inflationary acceleration that we saw in the group. In addition, items adjusted for past inflation continued to have a negative impact on the index. This is the case for renting residential units and condominiums, ”he assesses.

Another point Cruz made regarding the less strong decline in the Brazilian market is that US stock exchanges also started to improve on the eve of US inflation data, with expectations of slightly better data, which was partly accompanied by the local stock exchange. .

As highlighted by Ágora Investimentos, this Tuesday’s session once again brings positive signals from abroad, based on news of more than expected progress in new loans from China and signs of oil supply restrictions by OPEC+.

China’s central bank extended a bailout package for the country’s real estate sector, and as a result, on the Singapore Exchange, benchmark iron ore in August rose 1.8% to $105.5 a metric ton, recovering some losses from the previous session.

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In this environment, stock markets in Europe ended the day with gains, favored by energy companies, while in New York, indices also posted gains.

Risk appetite and dollar weakness against rival currencies also supported a rise in Brent crude in the early afternoon, up nearly 2% at $79.30 a barrel. Shares of PRIO (PRIO3) rose about 3%, and Vale Assets (VALE3), the company with the largest stake in Ibovespa, rose 2.7%, helping to cushion the index’s losses.

Tax reform is also on the radar

News of tax reform also gained prominence. After approval by the Senate last weekend, allies of President Luiz Inacio Lula da Silva are considering decoupling the Commission on General Elections from tax reform. Knowing about possible amendments by the senators, the project will be divided into two parts. With this action, any consensus between the two houses would be enacted, and points without agreement would continue to be debated in Congress.

For Gabriel Bassuto, chief equity analyst at the Simpla Club, splitting the reform could be a risk, because the Senate can approve whatever is unanimous and put off addressing the more important points of reform.

Already at the end of the morning, Reuters reported, citing sources, that the President of the Senate of the MDB, Eduardo Braga (AM), will be the rapporteur of tax reform in the Chamber of Deputies. Braga later confirmed the news on Twitter.

Discussions on the CCJ tax reform, according to which the reform already approved by the Senate will begin in the Senate, are expected to start only after the parliamentary recess, in August, according to the agency.

The governor of Amazonas, Wilson Lima (Uniao Brasil), declared in favor of reform, but demanded measures to preserve the Manaus Free Trade Zone.

Despite the decline in the session, Basuto believes that Ibovespa’s decline is a one-off and should not affect the positive trend of the overall market.