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With the nearly every major equity index down on the day on fears that Greece’s sovereign debt may spill well beyond its borders in what has been termed the “contagion effect” by the media. It appears consensus is beginning to understand that after eight centuries of data, sovereign debt crises have never ended with just one country. Others - perhaps Spain - will soon join the dance.  While that is a topic for another discussion (see my colleague Daryl Jones’ note from this morning titled “Bearish Enough On Spain?”), we’d be remiss not to call out the  near-3.6% intraday decline in the Bovespa, which, at the time of this print, had declined more than any major equity index outside of Europe.

Domestically, at 2.8% MoM in April and 19.7% YoY, Brazil’s March industrial production rose at the fastest pace in five months, signaling concerns that the Brazilian Central Bank’s recent Selic rate hike from 8.75% to 9.5% may not be enough to cool accelerating growth and inflation – which itself (CPI) sequentially accelerated to 0.39% MoM in April and  5.22% YoY for the 12 months though mid-April. The rate hike was the first since September of 2008.

Perhaps global sovereign debt concerns will continue to douse global markets. Unfortunately for Brazil, those aren’t the only concerns facing the Bovespa currently. The key issue is indeed slowing demand from China.

Chinese PMI slowed to 55.4 in April from 57 in March, raising concerns that Chinese demand for commodities will continue to wane. In addition, as a result of the Chinese government tightening, an estimated $400 billion yuan may flow out of property into equities, according to some estimates. Steps taken to cool the white-hot growth include China raising the reserve requirement ratios three times in the year-to-date. In the most recent change, China’s reserve requirement will increase 50 basis points effective May 10, the People’s Bank of China said on May 2. The current level is 16.5 percent for the biggest banks and 14.5 percent for smaller ones.  The intention of these measures are to slow loan growth and the velocity of money, which is a derivative for Chinese demand for commodities.

Some other steps taken by the Chinese government to directly combat property speculation include: 

  • China's Banking Regulatory Commission ordered 78 state-controlled companies to exit real estate sector;
  • Chinese Banks are now asking for 40%-50% down payments  for second mortgages;
  • In March, Chinese officials raised deposit requirements for buyers at land auctions to 20% of the minimum price to increase costs for developers;
  • China's State Council raised down payment requirements for second homes to at least 50% and have pegged mortgage rates to no lower than 110% of the benchmark rate;
  • China told banks to stop loans for third-home purchases on April 19th;
  • The State Council has approved a real-estate tax trial in Bejing, Chongquing, Shenzhen, and then in Shanghai following the World Expo;
  • The housing ministry vowed on April 20 to punish developers that "artificially" create supply shortages and ordered builders not to take deposits for sales of uncompleted apartments without their approval;
  • China's Securities regulator will require developers to submit fund-raising plans for strict review by the land ministry; and
  • On April 20th, China ordered developers to not take deposits for sales of uncompleted flats. 

All told, these tightening measures coupled will slow construction and temper global demand for commodities including oil and copper.

The Bovespa continues to be highly correlated with the price of oil, so where oil goes from here (down nearly 4% intraday), the Brazilian stock market goes with it.


Darius Dale


Brazil, How Low Can You Go? - 1


Brazil, How Low Can You Go? - Brazil CPI