Brazil Outlook not bright
Source: Trading Economics
And the biggest problem is not in the deteriorating situation in the labor market (the unemployment rate raised during the year from 4.3 percent to 8.2 percent, the highest level since the end of 2009) or in a two-digit inflation (in January inflation rate stood at almost 11 percent, the highest level since November 2003).
The biggest problem is the collapse in the manufacturing sector. In January, the year-on-year industrial production growth collapsed by -13.3 percent. That is the worst indication since 2009 – but there is no global financial crisis… How tragic is the result, we can see when taking into the consideration the fact that in the first month of this year, lower dynamics of industrial production have recorded only two countries: Mongolia and Kyrgyzstan.
Brazil Manufacturing Production (YOY)
If the situation in the Brazilian economy is so bad, then why is it so well at the floor in Sao Paulo? The Bovespa index rally has two sources.
- The first is a dynamic increase in raw material (commodities) prices. Looking at the chart below, it is worth noting that the Bovespa usually responds to the growing demand for commodities much more dynamically than CRB index. This can be a valuable hint for investors using futures contracts.
The second source of good Bovespa behavior is growing hope for a political change. Socialists, who rule for nearly 10 years, didn’t cope with the economy.The Petrobras affair hit them hard. This affair can be a contribution to a “new opening” in Brazilian politics. The next Brazilian general elections are scheduled for October 2018, and will elect the President, the National Congress, state governors and state legislatures. However, due to the ongoing political crisis and calls for the impeachment of incumbent President Dilma Rousseff for her alleged involvement in the so-called Petrolão scandals (Petrobras affair) the elections may be held sooner if the process ends with the nullification of the previous election by the end of 2016. Impeachment proceedings in Brazil cause legal chaos and political turmoil.
TECHNICAL ANALYSIS: BOVESPA
If we look at the Brazilian stock exchange within a broader term, the matter looks totally different – there is no reason to be optimistic. From the end of 2010 its main index (Bovespa) – after it formed a double top – is in at the downward trend. We can see that it’ll be very hard for Bovespa index to break the strong resistance at 5,500pts and exit descending channel.
That’s true that during the last 12 months, Bovespa has gone south by 11 percent. It means that at that time the Brazilian market was stronger than Chinese, Russian or Indian market. But lots of dips are certainly not a good signal for investors…
Sources: Trading Economics, Stooq,Europe Trader, Seeking Alpha