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Long Brazil ETFs, Short Rousseff Trade Works Again


In an extension of what has become a consistent, obvious trade, shares of the iShares MSCI Brazil Capped ETF (EWZ) are up 3.5% Friday after another poll showed waning support for Brazilian President Dilma Rousseff.

In a poll conducted by Datafolha, 36% of those surveyed said they would vote for Rousseff, down from 38% earlier this month, reports Rogerio Jelmayer for the Wall Street Journal.

The latest news of eroding support for Rousseff sent shares of Petrobras (PBR), Brazil’s downtrodden state-run oil company, higher by almost 6% on volume that appears poised to easily eclipse the daily average. Two Petrobras securities are found among EWZ’s top-10 holdings, combining for almost 12% of the ETF’s weight. [Petrobras Pushes Brazil ETFs Lower]

The db X-trackers MSCI Brazil Hedged Equity Fund (DBBR), which hedges Brazilian real exposure and is home to a higher yield than many expect out of Brazil ETFs, is up 2.4% on volume that is already more than 40% above the daily average. Two Petrobras securities combine for 13.3% of DBBR’s weight.

Since Rousseff took office on Jan. 1, 2011, Petrobras has been the worst-performing major large-cap oil stock with a U.S. listing. Even BP (BP), which had to contend with the aftermath of the largest oil spill in U.S. history, has outperformed its Brazilian rival over that time. [Brazil ETFs Soar as Rousseff Loses Support]

The trend of Rousseff’s pain equaling gains for Brazil ETFs goes back several months. Polls released in April and May that showed declining support for Rousseff sparked one-day rallies in EWZ and rival Brazil ETFs. On June 6, EWZ surged more than 3% after the previous Datafolha poll was released.

Despite two resounding losses to end the World Cup Brazil hosted, including one of the worst in the tournament’s history, EWZ is flirting with a gain of 5% for July, indicating that speculation that said those losses would come back to haunt Rousseff is proving accurate.

However, Brazil equity bulls do need to tread carefully in the months leading up to the country’s Oct. 5 elections. Rousseff is still polling ahead of her challengers with data showing she has a 44% to 40% lead over Aecio Neves of the Brazilian Social Democracy Party, whom she could face in an Oct. 26 runoff, according to the Journal.

If Brazilian stocks have been soaring on the back of bad news for Rousseff, it is possible a significant sell-off occurs if she is reelected.

iShares MSCI Brazil Capped ETF