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Traders Bet Soaring Brazilian Stocks, ETFs Will Soon Ebb

|About: iShares MSCI Brazil Capped ETF (EWZ)

Summary

Brazil is one of the most volatile emerging markets.

IShares MSCI Brazil Capped ETF (NYSEArca: EWZ) reports a three-year deviation of nearly 29%.

Brazilian stocks have been extremely volatile despite a recent surge after bout of political drama and flailing economy.

Brazil, Latin America's largest economy, is one of the most volatile emerging markets. That much is confirmed by a three-year standard deviation of nearly 29% for the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ).

Amid a severe bout of political drama and flailing economy, Brazilian stocks and EWZ, although they have recently been soaring, have also been extremely volatile. However, some traders are betting that volatility will soon ebb.

The move higher by Brazilian stocks has also been aided by the country's corruption crackdown. Earlier this month, Brazilian shares jumped as many traders believed the country is moving past a political gridlock that could lead to changes in the government and potentially kick-start the stagnate economy, Bloomberg reported.

The Brazilian rally went into high gear after former President Luiz Inacio Lula da Silva was detained, adding to speculation that support will grow to impeach his successor, President Dilma Rousseff. Amid intensifying protests, some market observers believe Rousseff's days in power are numbered. However, doubters remain.

"A measure of volatility for the iShares MSCI Brazil Capped ETF reached its highest level since the end of 2014 versus one tracking the U.S. stock market. But traders see the turmoil as temporary, betting volatility will drop by 9 percent in the next three months amid speculation a change of government can pave the way for needed reforms," reports Bloomberg.

Brazil's budget deficit has widened to 9.5% of GDP. Additionally, lower commodity prices, diminishing consumer credit boom and a corruption scandal at state-run oil giant Petroleo Brasileiro have all weighed on the economy.

Traders have been selling off Brazilian assets over the past year as Rousseff failed to stimulate the economy prevent credit downgrades. Now some investors are reevaluating Brazilian stocks, something that has benchmark indexes there trading at the highest multiples in a decade.

EWZ's volatility "has been among the most erratic funds this year, according to historical volatility on the 400 biggest exchange-traded funds trading in the U.S.," according to Bloomberg.

Although energy and materials stocks have gotten most of the attention as being the drains on the Brazilian equity market, weakness in bank stocks cannot be overlooked. Vulnerable bank stocks are particularly problematic for EWZ because financial services are the ETF's largest sector allocation, representing a third of the ETF's overall weight.

iShares MSCI Brazil Capped ETF

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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