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“Brazil’s capital markets appear to be suffering from a sudden flight of capital," says Michael Shaoul, warning of a danger of "abrupt collapse in investor confidence ... Brazil should be watched closely in the days ahead."
The Bovespa slid another 1.75% today, but more alarmingly, the country's 10-year yield spread (vs. the U.S.) shot to its highest level since the summer of 2009.
This morning, Q3 GDP was reported to have contracted by 0.5%, worse than expectations. From Capital Economics: "Brazil is not particularly attractive to foreign firms ... Woefully low domestic savings mean that Brazil relies on attracting foreign capital in order to fund investment projects. But with the current account already in a significant deficit, there is little scope for running up an even larger external deficit to fund investment."
Off 1.3% today, the iShares MSCI Brazil Index ETF (EWZ) is down 20% YTD.
Brazil's Q3 GDP contracts 0.5%, missing estimates of a 0.3% contraction, and the worst performance since 2011 Q3. On a Y/Y basis, the economy grew 2.2%. The decline in Q3 was led by agriculture, which fell 3.5%. Investment also declined 2.2%.
The news adds to complications for President Rousseff who is up for election next year. Her government has already slashed by nearly half its forecast for robust 4.5% growth in 2013.
The central bank last week continued its rate-hike cycle, but gave indications a pause could be coming soon, and the slow GDP report is unlikely to change that view.
Brazil's November PMI slips to 49.7 from 50.2 previously, the move into contraction territory led by New Orders which stayed below 50 for the 5th consecutive month.
"The only good news was that the measures of inflation included in the PMI report also lost momentum: firms saw input prices rising at the slowest pace since June and output prices climbing at the weakest rate since May," says HSBC's Andre Loes.Brazil's central bank raised the Selic 50 basis points to 10% late last week - but a tweak to the statement has some economists predicting just one more rate hike for this monetary tightening cycle (the Selic was 7.25% in April).
Fifty-one percent say they are pessimistic about the president's policies, up from 22% when she took office in January 2011, according to a Bloomberg survey. Only 10% say the country can avoid a credit rating downgrade in the next year. Compared to other major global markets, Brazil - says the survey - is expected to offer one of the worst opportunities over the next year.
Moody's last month followed S&P in lowering it credit outlook on Brazil to stable from positive, citing the 59% debt-to-GDP ratio compared to 45% median for other countries with the same rating.
The central bank has boosted the benchmark Selic rate by 225 basis points since April to 9.5%, and shows no sign of stopping this month.
That's a lot of bad news and bad sentiment. In the meantime, the stock market has fallen and can't get up. EWZ is off 15% YTD and about 40% from 3 years ago (and down 0.4% premarket). Opportunity?
Initiating cautious coverage on 8 Brazilian retail sector names (7 Holds, 1 Sell), Citigroup says multiples look expensive considering macroeconomic headwinds - among them rising inflation and interest rates coupled with a high level of consumer indebtedness.
"Slower demand presents top-line risks for Brazilian retailers exposed to the mid- and lower-income segments. Moreover, inflation could push operating expenses up while rising interest rates pressure financial costs for leveraged companies."
Taking advantage of the quick change in sentiment towards emerging markets in general and Brazil in particular, the Brazilian government today issued $3.2B in bond dues 2025. The paper was priced to yield 4.305%. About one billion of the total will be fresh cash for the government, the rest will pay off existing debt.
With developed market interest rates on the rise this summer, few had interest in emerging market debt, but the last several weeks have seen the taper delayed, the nomination of Janet Yellen to lead the Fed, and a sharp drop in interest rates. With U.S. rates looking like they're staying lower for longer, emerging market yields - no matter the risk (Brazil's credit rating outlook was lowered from positive to stable by Moody's this month) - become more enticing.
Also helping is a Brazilian central bank refocusing on inflation - it hiked its benchmark rate to 9.5% this month and gave every indication 10% is coming in November.
It's the 5th consecutive rate hike for the central bank, which raised the benchmark Selic 50 basis points to 9.5%. No changes were made to the accompanying statement, implying #6 is coming at November's meeting.
Economist consensus has rates at 9.75% by year's end, and many foresee double-digits in 2014. The most recent CPI data has annualized inflation at 5.86% - lower than a couple of months ago - but still well above the 4.5% marking the top end of the target level.
The Bovespa is lagging most major markets today, +0.5%.
Moody's cuts its outlook on Brazil's Baa2 credit rating to Stable from Positive, citing deterioration in key credit metrics, an economy unable to break out of a slow-growth phase, and "deterioration in reporting quality of the government accounts."
The government's debt-to-GDP ratios and the country's investment-to-GDP ratios are weaker than those of sovereigns with just a Baa rating, says Moody's. "Even though there are signs that the Brazilian economy may be starting to recover, Moody's view is that, if and when the upturn materializes, it is unlikely that it will be strong enough to restore a positive trend in Brazil credit metrics, a condition necessary to merit a positive outlook on the country's sovereign rating."
Brazil's PMI edges up to 49.9 in September from 49.4 previously. New orders and export orders both remained in contraction territory, but at a slower pace of decline, and output rose for the first time in three months.
Input prices however, accelerated sharply amid the decline in the real (BZF), with the index jumping to its highest level in nearly 5 years.
Petrobras (PBR) investors now have another reason to drown their sorrows after a nearly 20% decline in the Brazilian company’s shares over the past year: PBR has lost its spot as the most valuable brand in Latin America, falling behind the region’s top beer brand, according to a ranking by BrandAnalytics.
Mexico's Corona beer, produced by Anheuser Busch Inbev (BUD) and Constellation Brands (STZ), marched into the top spot with a brand value of $6.6B, up 29% Y/Y, according to the survey; PBR suffered a 45% drop in its brand value to $5.76B.
Brazil’s lackluster economic growth, reliance on commodities exports and government meddling has taken a toll on brand value in 2013.
The famously bearish-on-China Jim Chanos and Goldman's former sunny BRIC evangelist Jim O'Neill spent half an hour talking China at a Bloomberg conference last night.
China will have a "credit event" in five years, says Chanos; the Chinese economy will double in five years to $16T (the size of the U.S.), says O'Neill.
I can't really argue with being short the 'old' China," says O'Neill. Any slowing of the economy is being done deliberately in order to shift from a focus on investment to one on consumption. The "new" China will lead to investment opportunity.
If you think the macro picture in China is ugly, wait until you look at he micro picture, says Chanos.
Among the points the two agree on is mining - the industry will face difficulties. Those countries (Brazil and Australia come to mind) with exposure to iron ore will be in trouble over the next 12 months, says Chanos.
Asian state-owned companies dominate the list of participants: India's ONGC, Malaysia's Petronas, Colombia's Ecopetrol (EC), China's Cnooc (CEO) and China National Petroleum (PTR); China's Sinopec (SNP) will take part through joint ventures with Brazilian units of Spain's Repsol (REPYY.PK, REPYF.PK) and Portugal's Galp Energia (GLPEF.PK).
Analysts blame the lack of interest on new rules drawn up by Brazil's government that place development and profits under greater state control; too many companies don't want "the trouble of dealing with Petrobras (PBR) and the government. You can get good oil assets elsewhere without that."
Brazilian president Rousseff calls off visit to U.S.
Brazil's President Rousseff calls off a state visit to the U.S. originally planned for next month, the latest fallout from the spying allegations have strained U.S. relations with its Latin American ally.
Over the last two weeks, a Brazilian television news program revealed what it described as NSA slides it said were provided by Ed Snowden that appeared to show direct spying both on Rousseff and on state-run oil company Petrobras (PBR +0.9%).