On Friday, US-listed stocks with exposure to Brazil experienced significant declines following the announcement of a proposed income tax reform in the country. Petrobras (NYSE:PBR) saw a 4% drop. Now holdings (NYSE:) fell 4.7% and Vale SA (NYSE:VALE) decreased 2.6%. Additionally, Banco Bradesco (NYSE:BBD) fell 7%, Itaú Unibanco Banco Multiplo Sa (NYSE:ITUB) fell 6%, and StoneCo (NASDAQ:STNE) fell 5%. The iShares MSCI Brazil (NYSE:EWZ), an exchange-traded fund that tracks Brazilian stocks, fell 5%.
The Brazilian real weakened considerably, falling 1.6%, missing out on the rally experienced by other emerging market currencies. The performance of the real this week marked it as the worst among developing countries, with a drop of almost 5%. The ETF tracking Brazilian stocks also fell 4.6% in premarket trading in New York, poised to extend its 3.8% losses from the sessions through the previous Wednesday.
Investor confidence in Brazilian assets has been declining due to concerns about the country's rising debt levels and President Luiz Inácio Lula da Silva's increased spending to fulfill his campaign promises. October's budget deficit figures widened to 74.68 billion reais, far exceeding the previous month's 53.8 billion reais and beating economists' forecast of 50.1 billion reais.
Finance Minister Fernando Haddad's plan to reduce public spending by 70 billion reais until 2026 was met with skepticism, as it was considered insufficient to curb the budget deficit. President Lula's addition of a tax exemption for the poor further fueled doubts, suggesting a reluctance to commit to fiscal adjustments.
This fiscal uncertainty has affected inflation expectations, leading Brazil's central bank to consider interest rate increases, while the Federal Reserve indicates an easing of its policy. Market predictions now include an 88 basis point increase in the benchmark Selic rate in December and another 91 points in January. Incoming central bank governor Gabriel Galipolo expressed concern about unanchored inflation expectations, suggesting Brazil may need to maintain higher interest rates for an extended period.
Emerging market assets have generally been falling since the US election, anticipating higher global rates and a stronger dollar. However, the slowdown in the Brazilian market has been particularly pronounced: the real's 20% drop this year places it as the worst-performing currency among major and developing currencies. The stock index has also suffered, losing more than 7% this year and underperforming other emerging market stocks and global benchmarks.
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