Brazil Leads LatAm Market Gains; S&P 500 Falls to Lowest Level Since June

Mexico’s stock market saw the sharpest losses in Latin America on Thursday, while in the US, markets tumbled again following Wednesday’s interest-rate hike by the Federal Reserve

Workers stand outside the Brasil Bolsa Balcao (B3) stock exchange in São Paulo, Brazil.  Photographer: Tuane Fernandes/Bloomberg
By Bloomberg Línea and Bloomberg News
September 22, 2022 | 07:50 PM

A roundup of Thursday’s stock market results from across the region

🥇 Brazil leads Latin America gains:

Latin American markets had a mixed day on Thursday, with Brazil’s Ibovespa (IBOV) posting the highest gains, driven by the upward-heading shares of mining company Vale (VALE3) amid the rise in iron ore prices.

Investors also weighed Wednesday’s decision by the Banco do Brasil’s monetary policy committee to maintain the Selic interest rate at 13.75%, interrupting the cycle of high interest rates after a sequence of 12 consecutive increases.

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In a published statement, the monetary authority reiterated that “this decision reflects the uncertainty surrounding its scenarios”.

As for future meetings, Copom stressed that “future monetary policy steps may be adjusted and that it will not hesitate to resume the tightening cycle if the disinflation process does not continue as expected”.

📉 A bad day for Mexico’s BMV:

Mexico’s market chalked up a second consecutive day of losses amid the uncertainty generated by the monetary policies of central banks and their effect on economic growth. Mexico’s S&P/BMV IPC (MEXBOL) was dragged down by the shares of the materials, real estate and non-basic consumer products sectors.

“Stock markets remain with negative sentiment after the Fed’s monetary policy decision, increasing the risks of a downward revision in corporate earnings forecasts after weighing the impact of higher interest rates and a possible economic recession,” Banorte analysts said in a report.

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Investors also received the inflation data for the first two weeks of September, which showed an annual growth of 8.76%, slightly above the market’s expectations, which pointed to an increase of 8.72%.

🗽 On Wall Street:

Treasury yields surged to multiyear highs and stocks fell after a parade of central banks joined the Federal Reserve in boosting rates to curb scorching levels of inflation at the expense of economic growth.

The superlatives kept piling across Wall Street as a selloff in the world’s biggest bond market sent the 10-year yield to 3.7%, its highest since 2011. The two-year rate climbed for an 11th straight session -- the longest up streak in over three decades. The moves weighed on the tech space, with the S&P 500 failing to sustain a late-day rebound and moving closer to its June bottom.

The S&P 500 slipped 0.84% to its lowest level since June, while the Dow Jones Industrial Average dropped 0.35% and the Nasdaq Composite (CCMPDL) 1.37%.

The S&P 500 could be poised for more downside after breaking through a rare technical indicator, according to Berenberg strategists including Jonathan Stubbs.

It has traded below its 200-day moving average for over 100 sessions -- a streak that was previously breached only during the tech bubble and the global financial crisis in the past 30 years. In both of those instances, the gauge posted most of its losses after surpassing that level, with the index declining by a further 50% in 2000-2003 and 40% in 2008-2009 before troughing, they said.

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Evercore’s chief equity and quantitative strategist Julian Emanuel cut his S&P 500 year-end projection to 3,975 from 4,200 and expects a “full retest” of the June low in the weeks ahead. The target cut accounts for a rising probability of a recession following Fed Chair Jerome Powell’s warning that the rate-hike process won’t be “painless” for the labor and housing markets.

Its June bottom stands nearly 2.5% below current levels.

“The bad news is we are still in one of the weakest seasonal windows of the year, especially in a mid-term year,” said Jonathan Krinsky, chief market technician at BTIG. “The good news is that it quickly reverses by mid-October. We think we test or break the June lows before then, which should set up a better entry point for a year-end rally.”

Dennis DeBusschere at 22V Research expects markets to remain volatile while maintaining his neutral, range-bound stance for stocks.

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“It’s tough to get long until we get signs of slower underlying demand growth, but tail risk is limited by already tighter financial conditions, lower PEs, and higher implied vol,” he wrote.

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The environment isn’t suitable for strong directional positioning on overall indexes, according to Mark Haefele at UBS Global Wealth Management. However, he advises against retreating to the sidelines, “especially given the drag on cash from high inflation and the challenge of timing a return to markets without missing out on rebounds.”

“Instead, we stay invested but also selective, and focus our preferences on the themes of defensives, income, value, diversification, and security,” he added.

The dollar remained at record levels, fueled by hawkish Fed policy and investors in search of haven. The Swiss franc slumped as a central bank hike proved not enough to satisfy expectations, while the yen gained as Japan propped up the currency for the first time since 1998.

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The Fed gave its clearest signal yet that it’s willing to tolerate a recession as the necessary trade-off for regaining control of inflation, with officials forecasting a further 1.25 percentage points of tightening before year-end. Norway, Britain and South Africa also followed with hikes of their own as officials rush to get to grips with rampant price increases.

“We see this new even-higher-for-longer rate path as associated with a substantially greater higher likelihood of a hard landing, and so not just unambiguously hawkish but unambiguously bad for risk,” said Krishna Guha, vice chairman of Evercore ISI.

On the currency markets, the Bloomberg Dollar Spot Index was little changed, the euro was little changed at $0.9839, the British pound fell 0.1% to $1.1257 and the Japanese yen rose 1.2% to 142.35 per dollar.

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🔑 Key events of the day:

A slew of global central banks joined the Federal Reserve in its fight against the highest inflation in decades with increases in its benchmark rates.

The Bank of England made a second consecutive increase in a split decision in which three officials pushed for a faster pace of rate hikes.

The Swiss National Bank ended the era of negative interest rates and raised them by 75 basis points, while Sweden’s Riksbank surprised with a 100 basis point increase.

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Throughout the week, central banks in Norway, Mongolia, the Philippines, Taiwan, Indonesia, Vietnam and South Africa also joined the trend of tightening monetary policy to counter the high cost of living.

“Most of these rate hikes around the world are not over yet, which means the race into tightening territory won’t end until closer to the end of the year,” said Edward Moya, an analyst at Oanda.

🍝 For the dinner table debate:

Uncertainty surrounds the future of Mauricio Claver-Carone, president of the Inter-American Development Bank (IDB), following an investigation into an alleged relationship with a top aide, which would be against the bank’s rules.

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On Thursday afternoon, the IDB’s board of directors voted to recommend the removal of the lender’s president, after an investigation into the alleged romantic relationship.

In a statement published last Tuesday on the IDB website, Claver-Carone said he was fully cooperating with the investigation and insisted that he “does not corroborate the false and anonymous accusations that were made in the press against me or IDB staff”.

Last April, he had already described the allegations against him as a political campaign in the media.

However, as revealed by Bloomberg, Brazil, which is the second largest shareholder of the bank, supports the removal of the president of the entity. President Jair Bolsonaro’s administration believes Claver-Carone cannot continue to lead the bank, according to an official quoted by Bloomberg.

The Brazilian government has an 11.4% stake in the bank and together with the United States and Argentina have almost 53% of the decision-making power. Claver-Carone was expected to respond to the allegations today in a meeting with the bank’s executive directors, according to people with knowledge of the matter cited by Bloomberg.

-- Carlos Rodríguez Salcedo, a content producer at Bloomberg Línea, and Rita Nazareth of Bloomberg News, contributed to this report.

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