Brazil’s credit risk degraded, Lula constrained, stock market advice

The Brazilian Stock Exchange has an uncertain outlook at present. The Bovespa equity index has certainly done well this year, with a gain of 4% since the beginning of January (the country, rich in raw materials, has benefited from the tensions on prices caused by the war in Ukraine, among others) , but the technical analysis of the evolution of the courses reflects a certain heaviness. Indeed, if the Bovespa remains for the time being above its 100-day moving average (average, updated each day, of the last 100 closing prices – curve acting as dynamic bullish support), the upward movement of the last month is in a bad way, like the bearish divergences that appeared on mathematical indicators and the recent formation of a classic downward reversal pattern. And the Bovespa remains in a medium-term downward channel (see chart below). Over a longer period, the underlying momentum nevertheless remains buoyant at this stage, with the Bovespa remaining part of a long bullish channel (on a logarithmic scale, not arithmetic).


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Beyond the volatility of commodity prices (the bulk of Brazil’s exports), the country’s situation is not the most enviable. the Lula’s return to power “is taking place in a tense economic and social context, with slowing growth and sharply rising inflation (+12% in 2022)”, notes Cartan Trade, which underlines that “the decline in economic activity is constant since 2010” and that the post-Covid rebound “is already marking time”. Consumption tends to run out of steam and high unemployment is persistent.

The public finances of Brazil also appear degraded. Coface thus expects a public debt of almost 80% at the end of 2022 for the country, which should show a public deficit of nearly 8% of GDP. The program to fight against poverty and against hunger “should widen the public deficits and the Brazilian debt a little more”, warns Cartan Trade, which specifies however that “this debt remains internal to Brazil at 89% and is subscribed at 94% in reals”, while the large foreign exchange reserves built up by the massive export of raw materials “enable Lula to benefit from a still favorable financial situation”.


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For Cartan Trade, however, Lula’s room for maneuver remains “narrow, with a very narrow majority, which will force him to find compromises in his policy”. Brazil’s credit risk is degraded, according to the credit insurance establishment, which judges the “many uncertainties about growth prospects, the stabilization of inflation and especially about the evolution of commodity prices”. Caution, therefore, in the medium term.

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Brazil’s credit risk degraded, Lula constrained, stock market advice