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Brazil: Rate Hikes, Oil Gluts And Controversy

Summary

U.S. Rate Hikes Could Spell Massive Outflows.

Declining Oil Prices Put Increasing Pressure On the Brazilian Economy.

The Massive Scandal Surrounding Petrobras Could Lead to Further Problems.

Investors Are Looking to The Options Market For Brazilian Alpha.

Recent global developments have ushered in one of the most uncertain times for long term investors, swing traders, and day traders alike. That said, there is a glaring opportunity existing to take advantage of the imminent, almost certain collapse of the Brazilian economy. With the Olympics over, the Brazilian markets are painting a deceptive picture of how well things are really going. As expected, hosting the Olympics brought positive investor sentiment along with it. Without the Olympics as a cover for the lack of economic resources for basic human needs (police, hospitals, etc), or the worry of having to freeze your sperm before stepping foot on Brazilian soil, things get interesting. Below, I elaborate on the reasons causing many investors to exit Brazilian equities and establish short positions to participate in the South American country's perceived weaknesses.

  • Brazil is notorious for being sensitive to interest rate hikes in the United States.

The reasoning is pretty straightforward. All other problems aside, central banks and other "big money" investors historically move out of high-risk countries into safe-havens (United States Treasury bonds) when interest rates in the States rise. To make things worse, Brazil's high interest rates exacerbate the problem. Due to high interest rates and inflation in Brazil, private investors (such as investment banks) flee because their cost of borrowing is so high (14.25%). Just like high-yield bonds/dividends, issuers offering such high rates signal a red flag that makes you ask "are they THAT desperate for foreign investment that they're willing to pay over 10 percent to bondholders?' You can draw your own...


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