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Brazil: Volatile Market with no Trend – June 2010- IXE BANIF – Monthly Analysis

Focus spread over euro zone
Last month, we correctly anticipated that the Greek problem would negatively dominate the markets. However, we did not anticipate that fears would spread severely over to other countries, especially the other PIIGS members (Portugal, Italy, Ireland and Spain). After the sharp negative effect on all markets worldwide, we believe that investors continue to be sensitive, with wounds still open and, in the absence of any concrete positive news in June, markets are likely to remain tense, volatile and with no definite short-term trend. This expectation only differs from our view for the previous month in the lack of trend. We chose our suggested portfolio last month to remain defensive, and believe this is also the best choice for June, which is why we have made hardly any modifications. We have only withdrawn Tim, which was the month’s largest winner, and transferred its weight to CSN to keep the weight of the steel industry close to its weight in the Ibovespa. With this move, our portfolio has weights similar of those at the Ibovespa for the oil, mining, banks, steel, transportation and telecom industries, while we keep retail and utilities overweight.

Euro zone pros and cons
For the Euro zone, we highlight some important points. Positives: a) Economic activity in the main countries is not weak; b) Announcement of important measures directed toward stability in Portugal, Spain and Italy. Negatives: a) growth is likely to remain low for at least the next few years; b) risk rating downgrades might occur, particularly for banks, if tension continues at its current level or worsens and c) country debts are likely to stabilize at high levels. From 2008 to 2013, gross debt to GDP ratio will increase in most countries. Based on the assumptions of the European Commission, this ratio for Portugal should go from 66% to 90%, for Spain from 40% to 75%, Ireland from 44% to 93%, Italy from 106% to 118% and Greece from 99% to 135%.

Signs from other regions remain positive
In other regions, the economic trend continues to improve. In the US, the Fed revised its GDP growth estimate upwards to 3.5% for 2010 and we believe recovery is likely to continue slowly but surely. In China, the economy continues strong and on the verge of overheating, although inflation has not surpassed the official 3% limit and we see no reason for any change in course. Finally, in Brazil we also see strong signs of good and unchanged economic activity. At the announcement on June 8 of 1Q GDP we expect a 2.5% non-annualized growth that, if confirmed, would strongly support our estimate of a 7.0% growth for FY2010. On June 9, we anticipate announcement of the IPCA inflation index for May, which we expect to reach 0.45% (for June figures we expect a sharp reduction to around 0.3% that, if confirmed, would increase confidence in the growth trend of the GDP). On the same day, we expect announcement of the official Selic interest rate, when we anticipate another 0.75% hike as part of a measure to avoid the deterioration of the outlook for inflation.

See  full report Brazil_-_Monthly_Allocation_-_June_2010

Source: IXE Banif, 01.06.2010

Filed under: BM&FBOVESPA, Brazil, Exchanges, Latin America, News, Risk Management, , , , , , , , , , , ,

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