Trade Duration: 1 week - 1 quarter (price level/action determined)
1M 25 ∆ Puts on EWZ before implied volatility surges can work as well.
Thesis: Foreign capital flight out of Brazil as Prez Bolsenaro fires CEO of state run oil co Petrobas, as his approval ratings plummet for COVID & broader economic mismanagement, with truckers striking over high fuel prices. Petrobas chief is a U of Chicago free market trained capitalist who isn't beholden to truckers, causing tensions as Bolsenaro demanded lower oil prices. He was fired with no room for negotiations. Bolsenaro‘s policies were at one point pro-market/private sector, which attracted a ton of foreign capital— once (maybe still) among Bridgewater’s largest concentrated regional holdings.
However, capital leaves when capitalism leaves in place of interventionism.
With global equities relentlessly rising, increasing number of investors want something to sell but can’t. This is the idiosyncratic market to liquidate risk off amidst risk on. This is also the “dollar strength“ play for those waiting for something to sell USD against, as UST yields continue ↑
🇧🇷 Brazil IBOVESPA Index futures gap down -5% at open just now (Mon feb 22)
...as FX takes a hit on the Real, USDBRL +2.5%
EWZ: US listed iShares Brazil ETF (market not yet open) to follow ↓
EWZ Fund Flows:
Inflows haven't been enthusiastic, but when outflows go, they flee.
Immediate term downside momentum can snowball easily just based on profit taking sell flows. Longer term loss of investor confidence in Brazil’s markets can’t be repaired overnight if damaged enough - I see weak probability for some rebound rally when the index has been underperforming negative YTD as is, no incentive to buy prob means no incentive to buy “the dip.”
For now, this is the large liquid global index to sell vs US, EU, JP, EM majors.
Risk: Brazil’s Congress meets this week to try and pass more UBI fiscal. This may help support the index if investors feel consumers are recapitalized, but doesn’t do anything for crude situation. Brazil is at record deficits as is, so this isn’t too much of a risk but worth mentioning. However, this would in theory be an additional headwind against a weakening BRL.