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As Rousseff Gains, Brazil ETF Inches Towards a Bear Market


This year’s price action in Brazilian equities, the iShares MSCI Brazil Capped ETF (EWZ) and rival Brazil exchange traded funds has been easy to explain.

Investors bid those securities on news that shows waning support for President Dilma Rousseff ahead of Brazil’s Oct. 5 national elections. Conversely, positive polling data for Rousseff proves problematic for Brazil bulls. That much is on full display Monday as EWZ is the worst non-leveraged ETF to this point in the trading day with a loss of nearly 5% on volume that appears poised to easily top the three-month daily average of almost 19.6 million shares.

The negative catalyst is easy to spot: The most recent Datafolha polls shows Rousseff’s lead over challenger Marina Silva widening. Rousseff now leads Silva 47% to 43%. “Rousseff’s also gained in first round intentions, rising to 40 percent from 37 percent a week earlier increasing her chances she could win outright without a second round. Silva’s first-round support fell to 27 percent from 30 percent,” reports Reuters.

Under Brazilian law, a runoff can only be averted if one of the three candidates running captures more than 50% of the vote on Oct. 5. The runoff, if needed, would take place on Oct. 26.

When accounting for Monday’s tumble, EWZ is now off 18.5% this month, putting the largest Brazil ETF dangerously close to the 20% decline from its early September peak necessary to qualify the fund for the ominous bear market distinction. On Sept. 3, EWZ touched $54. Today, the ETF will have to work to close above $44. [Brazil ETF Flirts With New Bear Market]

Pressuring EWZ today is Petrobras (PBR). Shares of Brazil’s state-run oil giant, which have shown an intimate sensitivity to polling data, are lower by 10.3% today on volume that has already eclipsed the daily average.

Two Petrobras securities combine for over 12% of EWZ’s weight, not a good thing when considering that with today’s slide, the stock is down more than 30% just this month. 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. [Long Brazil, Short Rousseff Needs to Work]

So sensitive are Brazilian stocks to the specter of Rousseff winning another term that of the 10 worst-performing non-leveraged ETFs Monday, four, including EWZ are Brazil ETFs. Two others, the iShares Latin American 40 ETF (ILF) and the Guggenheim BRIC ETF (EEB) , have significant Brazil allocations.

iShares MSCI Brazil Capped ETF


Tom Lydon’s clients own shares of EWZ.