Ibovespa closes session sharply down with inflation in the US and is down 5% for the week; dollar approaches R$ 5

The Ibovespa closed down 1.51%, at 105,481 points this Friday (10), in its sixth session followed by losses and accumulating a low of 5.06% in the week – the worst since October 2021.

Today was marked, once again, by risk aversion, after US consumer inflation (CPI) for May came above consensus. The CPI increased 1% compared to April, a strong acceleration from the high of 0.3% registered in the fourth month of the year and surpassing the forecast of analysts consulted by Refinitiv, who estimated an increase of 0.7%.

“The CPI was the last straw for the market’s pessimism. It came very strong, above expectations, indicating that, perhaps, the interest rate increase has to be a little greater than expected in the largest economy in the world”, comments Fernando Bresciani, investment analyst at Andbank. “Next week, in addition, we have the Super Wednesday, with monetary decisions in Brazil and the United States”, he recalls.

The market’s perspective, with higher inflation in the United States, is that the Federal Reserve may accelerate its process of raising interest rates – the American treasury bond maturing in two years closed trading at a rate of 3.065%, up by 24 basis points and the highest level since June 2008.

Read also: US inflation hits highest level in nearly 41 years, intensifies aggressive Fed bets and raises risk aversion in the market

Major US banks such as Goldman Sachs, Bank of America and Morgan Stanley have stated in reports that they now expect a more hawkish of the Federal Reserve in the future.

Goldman sees that the US monetary institution may raise the country’s benchmark interest rate by 0.5 percentage point in the next three meetings (compared to the old perspective of two hikes of 0.5 and one of 0.25). BofA sees a greater chance of a 0.5 point increase in September. Morgan Stanley, for its part, sees Fed Chairman Jerome Powell’s comments to be tougher next Wednesday.

Dow Jones, S&P 500 and Nasdaq were down 2.73%, 2.91% and 3.52%, respectively.

Longer-lasting inflation increases risk aversion

The perception that inflation may last longer than expected increased risk aversion and pushed the dollar up – the US currency strengthened again against the real, closing the day up 1.49% against the currency. Brazilian market, at R$ 4.988 in purchases and at R$ 4.989 in sales, accumulating an advance of 4.3% in the week.

“What has happened is that the market has repriced the US interest rate hikes and all currencies are weakening against the dollar. The big change is due to this market movement, which sees stronger interest rate hikes in the United States”, explains Luciano Costa, chief economist and partner at Monte Bravo Investimentos.

The DXY, an index that measures the strength of the dollar against a basket of other currencies, closed up 0.93%, at 104.18 points.

In Brazil, still this Friday, the Brazilian Institute of Geography and Statistics (IBGE) announced that, in April, retail sales increased by 0.9%, above the consensus of 0.40%, which helped push the yield curve up.

At the aftermarket, around 5:30 pm, the DI contract maturing in January 2023 has its yield advancing two basis points, as well as the one for 2025, at 13.38%, and 12.51%, respectively. On the long end, the DIs for 2027 and 2029 have their rates rising by one point, to 12.48% and 12.61%.

The rise in the dollar and the yield curve mostly explain part of the biggest drops in the Ibovespa today.

Azul (AZUL4), Gol (GOLL4) and CVC (CVCB3) – with drops of, respectively, 6.98%, 5.76% and 5.09% – are companies directly impacted by the rise in the American currency, which increases the price of fuel in the domestic market and reduces the purchasing power of Brazilians.

Positivo (POSI3) and Locaweb (LWSA3), which fell 6.25% and 5.26%, are technology companies directly impacted by the prospect of higher interest rates.

Fiscal and China weighed on Ibovespa for the rest of the week

The main index of the Brazilian stock market accumulated a series of lows during this week, being in its sixth consecutive decline.

“First, there was the surprise of a new lockdown in China, which somewhat discouraged investors. This had a direct impact on Brazilian commodity companies, which recorded significant drops, especially in the last three trading sessions”, comments Luiz Adriano Martinez, portfolio manager at Kilima Asset. “At the beginning of the week, the outlook was that restrictions were over.”

This Friday, Shanghai, the second largest Chinese city, imposed a new lockdown in almost its entire perimeter due to the increase in new cases of Covid-19.

In Brazil, throughout the week, the Ibovespa also suffered due to fiscal threats, after the Federal Government announced that it intends to zero ICMS on fuel, without explaining exactly how it will compensate for the expenses of this measure.

“When we look at it by sector, the sectors most negatively impacted are cyclical consumption, technology and real estate. This may have to do with the opening of the interest curve in Brazil, which took place after the announcement of the containment of fuel prices, which tends to worsen the fiscal situation”, concludes Martinez.

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