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On Wednesday, November 7th, the Brazilian Stock Exchange (Bolsa de Valores) experienced a significant surge as investors directed their attention to domestic economic conditions, causing the primary indicator of Brazilian stocks, the Ibovespa, to close at a record high. The index ended the trading day with a 0.69% increase, surpassing the 119,000 point mark.
The previous day, the Ibovespa had also seen a positive trend, climbing by 0.23% and reaching 118.4 million points. However, it was the approval of Senator Eduardo Braga’s amendment to the tax reform bill by the Senate Constitution and Justice Committee (CCJ) that stole the spotlight on this particular day. Twenty individuals voted in favor of the Proposal to Amend the Constitution (PEC) No. 45/2019, with only six opposing it. Notably, the committee’s president, Davi Alcolumbre, refrained from casting a vote.
The manuscript of the tax reform bill had been submitted by the author on October 25, allowing the commission members a two-week period to review it. To iron out the details of the vote, President Luiz Inácio Lula da Silva met with Senate and cabinet leaders on the evening of November 6th. The government has prioritized economic reform for the year, making it one of their top objectives. Earlier in the year, the PEC had already been approved in two separate rounds by the Chamber of Deputies.
The next step for the document is to be put to a vote in the full Senate on Thursday, November 8th. This development is bound to attract further attention from investors and market participants, as the outcome of the vote will have significant implications for the Brazilian economy.
Another factor that contributed to Wednesday’s market surge was the release of the minutes from the most recent meeting of the Monetary Policy Committee (Copom) of the Central Bank (BC). During this meeting, the Governing Council announced a 0.5 percentage point cut in the basic interest rate (Selic), lowering it to 12.25% per year.
The Copom’s minutes indicated that monetary authorities are particularly concerned about the government meeting its fiscal targets. Their view was reiterated that a decrease in efforts towards structural reform and fiscal discipline, alongside increased targeted credit and uncertainty surrounding the stabilization of public debt, possess the potential to raise the economy’s neutral interest rate. Such an increase would have harmful effects on the effectiveness of monetary policy and, subsequently, the overall economy.
The positive performance of retail-related stocks played a crucial role in driving the early gains of the Ibovespa on Wednesday. Notably, Magazine Luiza experienced the largest gain of the day, with its stocks increasing by almost 23%. These gains mirrored similar positive trends witnessed in the previous week.
The decrease in the value of the Brazilian real has been partially attributed to the unexpected positive news regarding interest rates. The Copom’s decision to cut the Selic, combined with the Federal Reserve’s decision to maintain interest rates in the United States, has influenced the decline of the real. Although the current US interest rate stands at its highest level in 22 years, it has remained unchanged for the second consecutive meeting of the Federal Open Market Committee (FOMC) of the Fed.
As the trading day drew to a close, the US dollar depreciated against the Brazilian real, reaching its lowest level in over a month. The dollar fell by 0.25% and was trading at R$ 4.875. Overnight, it dropped by 0.16%, trading at R$ 4.887. Consequently, the currency has experienced a decline of 3.29% this month and 7.64% this year.
Overall, Wednesday’s market activities, fueled by the approval of the tax reform amendment and the release of the Copom’s minutes, played a significant role in increasing investor confidence. The positive performance of retail-related stocks further boosted market clearance, while the declining value of the US dollar against the Brazilian real added to the overall positive sentiment. As investors and market participants eagerly await the Senate’s vote on the tax reform bill, the stock market remains poised for continued growth.
