By Tim Seymour
Part of Brazil’s growth dynamic is rooted in the record low interest rates that have resulted from a combination of aggressive Central Bank policy and global growth factors. Brazil has never seen more constructive domestic macro conditions: Record low rates, mild inflation, 5.5% unemployment and a government that is attempting to fix massive bottlenecks in the economy.
Brazil’s stock market has lagged behind other emerging markets in 2012 and could be ripe for a rebound and catch up with its peers in 2013. Signs are beginning to surface suggesting a large bullish move in Brazil’s stocks as the Brazilian economy recovers.
Option traders are already bidding up Call Option in iShares MSCI Brazil Index Fund (EWZ) pushing outstanding call levels to the highest level since February 2009. In fact just 30 minutes into trading today a single buyer of 5,000 JUN 13 58.50 calls were purchase above the bid.
According to economists polled by Bloomberg, economists are forecasting an GDP expansion of 3.8% in 2013 and with Brazil being China’s largest trade partner the two economies should play off each fairly well. We are seeing evidence of the rebound in China’s factory production increase of 10.1% last month.
Bottom Line: Speculation in Brazil’s rebound has call options hitting a four year high. Right or wrong Brazilian bets are being made. We think rightly.