In Brazil Election, a Stark Choice on Economic Direction

October 24, 2014

James B. Stewart – The New York Times, 10/24/2014

Sunday’s presidential election in Brazil may be too close to call, but investors have already voted with their reais and dollars — and it’s Aécio Neves in a landslide.

Rarely, if ever, has such a pro-growth, market-friendly candidate emerged as a serious presidential contender in a developing country, let alone one as large and influential as Brazil, which has the world’s seventh-largest economy as measured by gross domestic product. With every twist in the polls, the Brazilian stock market surges (if Mr. Neves is ahead) or plunges (if not) while largely ignoring fundamentals like commodity prices, the faltering Brazilian economy or global crises.

Perhaps nothing has more endeared Mr. Neves to investors than his announcement on Oct. 5, right after qualifying for this weekend’s presidential runoff, that he would name Arminio Fraga his finance minister. Mr. Fraga is an unabashed champion of market capitalism and pro-growth government policies. He has a Ph.D. in economics from Princeton and drew international praise as the head of Brazil’s central bank from 1999 to 2002, steering the Brazilian economy through a difficult period that coincided with the implosion of the dot-com bubble and a recession in the United States. He was a managing director at George Soros’s fund in New York, and after leaving Brazil’s central bank, he helped start the hedge fund Gávea Investimentos. A unit of JPMorgan Chase acquired a controlling stake in 2010.

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Brazil $101 Billion Swaps Position Looms Before Election

October 24, 2014

Cristiane Lucchesi, Ye Xie, Josue Leonel – Bloomberg, 10/24/2014

Fourteen months after Brazil began selling billions of dollars-worth of derivative contracts to shore up its currency, the strategy is proving ineffective and raising concern in financial markets.

The real fell to a six-year low yesterday and is the world’s most volatile currency. Some analysts say the swaps, which are equivalent to selling dollars in the futures market and now amount to 27 percent of foreign reserves, are approaching critical levels. The opposition’s presidential candidate has indicated he’d discontinue their use.

“The swaps program has reached its limit and it needs urgent review since it is losing efficiency and credibility,” said Tony Volpon, the managing director and head of emerging markets research at Nomura Holdings Inc., Japan’s largest brokerage.

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How to Fix Brazil’s Broken Economy

October 24, 2014

Joshua Kempf and Mark Kennedy – Foreign Policy, 10/23/2014

The last two decades made obvious a life’s-not-fair fact: Big countries can get away with bad economic policy. Size matters to investors, global corporations, and entrepreneurs because a winning payout is large and can justify the costs of bureaucracy, compliance, and corruption.

China, India, and Brazil attract big investor dollars not because they are business paradises — check out their World Bank’s “Doing Business” rankings. To understand how business leaders think, let’s imagine you built a company with 85 percent market share in more business friendly Estonia. Congrats, they’ll say, those size revenues are in a multinational’s second footnote once removed.

Which brings us to Brazil. Despite its numerical advantages, Brazil has stagnated, and is expected to have just 0.4 percent economic growth this year. What’s wrong? Many analysts have pointed out the obvious: Brazil needs to improve its education, healthcare, and infrastructure. Few economists would disagree, but these are deeply rooted problems with decades-long solutions. Brazilians go to the polls on Sunday to select a president. What reforms can be done during one term to unleash Brazil’s charmed bequest, its size? Here’s the policies we think should be on the agenda.

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Real Drops to Lowest Since 2008 as Rousseff Leads in Voter Polls

October 24, 2014

Paula Sambo and Filipe Pacheco – Bloomberg, 10/23/2014

Brazil’s real fell to the lowest since December 2008 after polls showed President Dilma Rousseff led candidate Aecio Neves three days before the election runoff.

The real declined 0.5 percent to 2.50 per dollar at the close of trade in Sao Paulo after earlier today falling 1.2 percent. The Ibovespa tumbled 3.2 percent, leading losses among major stock benchmarks and erasing this year’s gain.

“Investors are more and more pricing in a victory for Rousseff,” Andre Perfeito, the chief economist at Gradual Investimentos in Sao Paulo, said by telephone. “Many traders are still cautious, but these polls show she is ahead, and people are considering that in trading the currency.”

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What Will Happen Monday, After Brazil Election?

October 24, 2014

Dimitra DeFotis – Barron’s, 10/23/2014

The Brazil equity market has tumbled nearly 8% this week and has slipped into negative territory for the year.

The iShares MSCI Brazil Capped ETF (EWZ) is down more than 8% this week, and has fallen more than 7% year to date. Among Brazil equities, even shares that should be somewhat more immune to Sunday’s election have been hit hard in recent days, including airplane maker Embraer (ERJ) and meat producer BRF (BRFS and BRFS3.Brazil).

The odds are with Brazil’s incumbent Pres. Dilma Rousseff, if ever so slightly, to win Sunday’s runoff presidential election and defeat Aecio Neves, a former governor who is more conservative and the investor favorite. Here’s Societe Generale’s Benoit Anne on anything denominated in Brazil’s currency. He is on the sidelines at this juncture, even if the election outcome is a binary one:

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Market Forecasting Dilma Win In Brazil On Sunday, Turns To Post-Election Scenarios

October 24, 2014

Kenneth Rapoza – Forbes, 10/23/2014

The market is now forecasting that incumbent Dilma Rousseff will be re-elected president in a squeaker on Sunday. Although rival Aécio Neves could pull off an upset if enough of Marina Silva’s voters choose him or opt-out of voting for anyone, his victory would now be seen as a surprise. Downside risks remain in Brazilian equities.

Neves came from polling in third place behind Marina Silva to clobbering her in the first round on Oct. 5, thus guaranteeing him the No. 2 contender spot against Dilma. Polls have suggested that at least 60% of Marina’s voters would chose Neves on Sunday, but he needs a little more than 65% providing the rest of Marina’s voters choose Dilma. So far, that has not been the case as only around 20% of Marina’s voters said they would vote for Dilma on Sunday, meaning the current crop of undecided voters will call the shots.  Recent polls show a technical tie.

It is worth noting that the market’s forecast is not exactly the market’s preference.  At this stage, investors are broadly looking for change in Brasilia, even more so than the average Brazilian.

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Brazil Stocks Sink As Jim Chanos Slams Petrobras

October 22, 2014

Kenneth Rapoza – Forbes, 10/21/2014

Sometimes all it takes is a celebrity investor to say something bad about a market and the investor riff-raff go running for the door. On Monday, famed investor and regular CNBC guest Jim Chanos said Brazilian state owned oil company was not an investment, but an investment scheme. He was referring to what most Petrobras watchers already know — that the company is used by the government as a revenue stream, and as a means to control inflation as it keeps a lock on gasoline prices.

Chanos said this on a day when Petrobras shares had down their usual mega-drop, falling 6% in a day. Less than 12 hours later, the stock opened 6% lower on Tuesday following Chanos’ guidance. He’s laughing all the way to the bank this week.

And while every broker and trader on the Bovespa floor in São Paulo needs something to tell newswire reporters about the wild drop in Brazilian equities today, it is very unlikely that the recent poll by Datafolha showing incumbent Dilma Rousseff neck and neck with challenger Aécio Neves is any reason for investors to sell Brazil. Business Insider gets it. Linette Lopez wrote in a headline today that Chanos Tanked Brazil.

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