Good news out of Brazil today, June 29. (Yes, Virginia, there is good news somewhere.)
I know. I know. The Brazilian stock market is taking it on chin this morning on worries about slowing growth in China. What do you expect? China is a huge export market for Brazil. If growth in China falters, Brazilian companies such as iron ore exporter Vale (VALE) will see revenue plunge. Futures on Brazil’s Bovespa stock index were down 1.7% as of 8:30 a.m. ET.
So where’s the good news?
It comes from the inflation front.
The IGP-M index, Brazil’s broadest measure of inflation, rose at a slower rate in June than in May. The index was up 0.85% in June from May. That’s slightly above the consensus forecast of 0.8%. But it’s well below the 1.19% increase in May from April. That’s a strong indication that the central bank’s aggressive series of interest rate increases is working to slow inflation.
Much of the increase in inflation in both May and June, as well as the moderation in June, came from a 50% increase in iron ore prices in May. Iron ore prices rose another 23% in June.
Inflation at the consumer level, however, fell with consumer prices declining 0.18% in June.
The index as a whole was up at an annual rate of 5.17% in June. That’s down from the 5.22% annual rate in May, but it’s still above the central bank’s 4.5% inflation target for 2010.
The slight decline in the inflation rate in June won’t be enough to stop the Banco Central do Brasil from raising interest rates again at its July 20-21 meeting, according to a central bank survey of 100 economists. The consensus is looking for an increase in the benchmark Selic interest rate to 11%
The Banco Central has raised rates twice this year to a current 10.25% from a record low of 8.75% in March in order to slow economic growth and inflation. The Brazilian economy grew at an annual rate of 9% in the first quarter of 2010. (Interest rates in Brazil are historically among the highest in the world reflecting the country’s long-term history of run-away inflation. Under the last two presidential administrations the country has gotten its fiscal house in order—Standard & Poor’s rated Brazil’s debt as investment grade for the first time ever in April 2010—but it will take a while for that to lead to lower interest rates.)
But if the June decline in inflation isn’t enough to end the central bank’s rate increases, it should give investors confidence in projections that the bank will call at halt to the increases in the last quarter of 2010 at somewhere around 12%. That would lift one burden now weighing down Brazilian stocks.
And that’s the good news today from Brazil.
Hi,
So if we are almost at the end of the rate increase in Brazil, how can we gain any thing from it?
I know we can buy stock but why not buying some brazil bonds. How can we access and buy those bonds? Is there a way?
Ed,
You wrote:
“For more agressive investors, commodity shorts work pretty well. The only problem with this is you have to be picky about your commodities, since some commodities are very susceptible to currency exchange rates (i.e. oil)”
What shorts would you recommend?
If you don’t mind my asking? What are you currently shorting or invested in?
I’m a newbee — whose grandmother made a lot in the stock market years ago and am trying to see if I have the same knack… But I have to be very careful, as I am very new at this.
Thanks!
🙂 Anne
thanks sigli, i’ll add those to those i’m thinking about…
semievolved,
Last I checked you cannot purchase Brazilian bonds or open a Brazilian bank account. I’ve liked Templeton Emerging Income ETF for emerging market bonds, but you can probably find a better mutual fund if you look hard enough. TEI pays a special dividend at the end of the year, which varies, so you have to consider a possible bonus to the standard dividend rate ($.25/quarter). The special dividend makes it a nice trade toward Novemeber-December as well. It’s trading at a discount to NAV right now, but I still don’t love the price.
Fasten your seat belts…
S&P500: 1,038.00
-36.57 (-3.40%)
Real-time: 3:23PM EDT
Christopher:
I hope it’s only a decade.
yx,
Is that the lost decade that has lasted more then twenty years. 🙂
Ed, thanks. i don’t know even how to start to go outside the usual channels. i wouldn’t mind a well run emerging markets fund but seems it’s harder to get concentrated where you want to that way, and, as i mentioned, the overall value tends to suffer if interest rates go up fast or much. that said, have you come across any especially appealing emerging market bond funds?
I have started to worry about deflation too. It looks we are on track to be the next Japan (a lost decade).
semievolved,
I’ve been trying to find Brazilian bonds myself. Unfortunately, the only thing I’ve managed to find are various emerging market bond funds. I suspect you’d have to go outside the normal channels to get a Brazilian bond.
anybody with recommendations for a good Brazilian bond? i am interested in buying an individual bond or 2 or 3 that is (are) reasonably secure. that way, i would probably hold to maturity and not lose (as i would in a mutual fund) if interest rates go up.
with interest rates that high, i’d be happy to give up a couple points to get a low-risk bond and just take the 6 or 7% interest.
any ideas???
jamba,
For conservative investors, simple cash is a good choice (i.e. a money market fund).
For more agressive investors, commodity shorts work pretty well. The only problem with this is you have to be picky about your commodities, since some commodities are very susceptible to currency exchange rates (i.e. oil).
The only problem with deflation is that the first thing Bernanke will do at a clear indication of deflation is to crank up the printing presses, assuming Geithner doesn’t beat him to it.
Truth be told, we are right on the border of inflation/deflation, and demand will push us one way or the other, assuming no central bank or government intervention.
Days like today leave me frothing at the mouth… I’m sitting on investable cash and when I see brazilian indexes and other world stocks take a 1 day 4-5% bashing I want to buy.
You’ve mentioned before that we’re waiting for an entry point for emerging markets like brazil and china… when is that? I’m looking at BRAZ and EWZ right now and feeling a bit frustrated that I don’t know when the right time to pull the trigger is.
Ed,
This from Art Cashin on CNBC:
“We’ve been worried about inflation, but I’m more worried by deflation.”
Cashin agreed.
He pointed to “bad data” on a global scale, especially coming from China, Japan and “Spanish banks.” And that international agglomeration of gloom affected US bonds — which are, in turn, sending their own sobering message, he believes.
“The 10-year is below 3 percent. I think that’s kinda screaming, ‘Look out for deflation,'” Cashin declared.
If true besides cash what investments would work in this enviroment? High dividends?
Off Topic (again):
3 Lies about the Economy:
http://www.marketwatch.com/story/story/print?guid=4CAD4B15-F472-4009-88AF-719A7CD7F5B4
Ed… it was a LOL for me, especially the Panic. Too good not to share.
Run26.2,
That is great! LOL!
Off Topic:
Wall Street Cheat Sheet: Psychology of a Market Cycle
http://wallstcheatsheet.com/wp-content/uploads/2010/06/Psychology-of-Market-Cycles.jpg
Painfully true…
Brazil is my investment in China.