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Why Brazil’s equity market keeps dropping (Part 5)

Senior Credit Analyst

Continued from Why Brazil’s equity market keeps dropping (Part 4)

Regulatory measures have played a large role recently in moving the market

Interest rates hike

The government surprised most analysts with an interest rate hike of 50 basis points. After the previous 25 basis point hike in April, most analysts were expecting the same shy increases. But instead, the Brazilian Central Bank decided to shoot down inflation at all costs by raising the SELIC rate (its overnight rate) from 7.5% to 8.0%.

The market initially inched slightly higher, as investors welcomed the strong action against inflation and bullish view of the market. But then the market dropped steeply the next day, after investors realized there was really no growth in the pipeline. Equity markets generally drop when interest rates rise, given that the increased cost of capital will reduce investment and slow growth.

Removal of Financial Transaction Tax (IOF)

This is a measure that should have had a positive effect on the market but that went the other way. While the removal of the 6% taxes on financial transactions should have made the market more attractive and hopefully strengthened the currency, it instead probably gave investors the opportunity to exit the market, knowing the 6% would not be factored into their costs.

The IOF tax removal will have medium- to long-term positive effects.

Read on for the conclusion to this series and discover the likelihood of Brazil’s recovery in Why Brazil’s equity market keeps dropping (Part 6).

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