On Friday, U.S.-listed stocks with exposure to Brazil experienced significant declines after the announcement of an income tax reform proposal in the country. Petrobras (NYSE:PBR) saw a 4% drop, Nu Holdings (NYSE:NU) fell by 4.7%, and Vale S.A. (NYSE:VALE) decreased by 2.6%. Additionally, Banco Bradesco (NYSE:BBD) plummeted by 7%, Itau Unibanco Banco Multiplo S.a. (NYSE:ITUB) by 6%, and StoneCo (NASDAQ:STNE) by 5%. The iShares MSCI Brazil (NYSE:EWZ), an exchange-traded fund tracking Brazilian equities, was down 5%.
The Brazilian real weakened considerably, with a 1.6% drop, missing out on the rally experienced by other emerging market currencies. The real's performance this week marked it as the worst among developing nations, with a nearly 5% decline. The ETF reflecting Brazilian stocks also fell 4.6% premarket in New York, poised to extend its 3.8% losses from the sessions through the previous Wednesday.
Investor confidence in Brazilian assets has been waning due to concerns over the country's rising debt levels and President Luiz Inacio Lula da Silva's increased spending to meet his campaign promises. October's budget deficit figures widened to 74.68 billion reais, far exceeding the 53.8 billion reais from the month before and surpassing economists' forecast of 50.1 billion reais.
Finance Minister Fernando Haddad's plan to reduce public spending by 70 billion reais through 2026 was met with skepticism as it was deemed insufficient to curb the budget deficit. The addition of a tax exemption for the poor by President Lula further fueled doubts, suggesting a reluctance to commit to fiscal adjustments.
This fiscal uncertainty has affected inflation expectations, prompting Brazil's central bank to consider interest rate hikes while the Federal Reserve indicates a policy easing. Market predictions now include an 88 basis point rise in the benchmark Selic rate in December and another 91 points in January. The incoming central bank governor, Gabriel Galipolo, expressed concern over unanchored inflation expectations, suggesting that Brazil might need to maintain higher interest rates for an extended period.
Emerging market assets have been generally declining since the U.S. election, anticipating higher global rates and a stronger dollar. However, the Brazilian market's downturn has been particularly sharp, with the real's 20% drop this year marking it as the poorest performer among major and developing currencies. The Ibovespa stock index has also suffered, losing over 7% this year and underperforming compared to other emerging market stocks and global benchmarks.
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