The Brazilian stock market is likely to return from its Carnival break with a sharp decline this Wednesday (26), when it reopens at 1 pm, after two days of high tension and sharp devaluations in international markets due to concerns about the advance of coronavirus.
The announcement, on Tuesday night (25), of the first concrete suspected case of covid-19 in Brazil, of a man who came from Italy, should complicate the scenario.
Since Monday (24), while Brazilian negotiations remained paralyzed, the index fund (ETF) that replicates the Ibovespa in dollars (iShares MSCI Brazil) fell 6.4% on the New York Stock Exchange.
Ibovespa Fall
“The trend is for the Ibovespa to fall as well. However, the two indexes are, in theory, moving together. Everything indicates that the downward pressure on the Ibovespa will be quite severe,” says André Perfeito, chief economist at Necton.
Petrobras and Vale's ADRs traded in New York have fallen 8.8% and 10%, respectively, since Monday. Gerdau's ADRs have accumulated a drop of 8.6%, and Bradesco's, 5%.
As the Ibovespa index in New York and the shares of Brazilian companies are traded in dollars, they incorporate any potential rise in the US currency. On Tuesday, however, the DXY index, which measures the international strength of the dollar, fell 0.4%. The currency closed on Friday, the eve of Carnival, at R$ 4.394.
The dollar's depreciation on Tuesday reflects investors' bets on cuts in US interest rates. The cuts would be a way to stimulate the economy, which is expected to be strained by the coronavirus.
On Tuesday, cases were identified in Switzerland, Austria, Croatia and Spain. The Swiss case is a man who had recently been in Milan. Also on Monday, the main global stock markets suffered sharp falls with the emergence of new outbreaks of the disease in countries outside China, especially in Italy. On Tuesday, the markets continued to fall after the US Centers for Disease Control and Prevention.
The Dow Jones index fell 3% and reached its lowest level since October 2019, with the two worst trading sessions in a row since 2018. The S&P 500 and Nasdaq reached their lowest values since December, falling 3% and 2.7%, respectively.
Investor Risks
The yield on the 10-year U.S. Treasury note has fallen to its lowest point on record, at 1.354% per year. With risk aversion, investors are selling riskier assets, such as stocks, and seeking safer products, such as Treasury bonds. Unless the herd movement causes stock indexes to plummet and fixed-income securities to become more expensive, which reduces their yield.
The Stoxx 50, an index that tracks the shares of Europe's largest companies, fell 2% on Tuesday after falling 4% on Monday, when the main European indexes recorded their biggest drop since 2016, and gold, a safe-haven asset, was at its highest price since 2013.
“For the first time in a while, we are finally waking up to the fact that this problem could continue for a period of time and have a significant impact on Chinese and global economic growth, and potentially in the US,” says Randy Frederick.Until now, investors have been relatively cautious about the potential damage the coronavirus could do to the global economy.
The arrival of the disease in northern Italy, however, has rekindled tension and concerns. There have already been 11 deaths in the country and 320 people infected. In addition, the main regions affected are the north and northeast of the country, areas that make up an important industrial hub in Europe, south of Switzerland, Austria and Germany.
Oil prices continue to fall, reflecting a potential reduction in fuel demand as the global economy slows to contain new outbreaks.
The Brent barrel fell 2.3% to US$ 55, and WTI, 3%, to US$ 49.90.