As soon as Lula’s reelection was announced, EWZ was slammed from 45 straight down to 32
Bottom line first: I’m leaning toward a short-term rebound and recovery, but I don’t buy a reversal.
First, what happened?
The results of Brazil’s presidential runoff came in last night. Lula won 51.75% of the valid votes, beating Bolsonaro Jr.’s 48.25%, and securing a fourth term.
Reuters confirmed it too: the electoral court made the official announcement—it wasn’t a poll.
The market was clearly not prepared for this result.
On the day Bolsonaro Jr. led 47% to 45% after the first round, São Paulo’s stock index hit a record. EWZ had already gained 13.87% this month through Friday’s close.
In other words, this month’s rally was all a bet on a change of government.
Once the result was announced, the reckoning began.
Spot EWZ plunged 19.63% after hours, from 42.59 to 34.23.
Binance perpetuals were even worse: down 22.4% over 24 hours, with the price at 34.98 and a low of 32.23 last night.
Brazilian real futures fell 10% overnight, sending the implied exchange rate straight to 5.56.
Tokyo-listed ETFs linked to the stock index were also down 12.75% early this morning.
Petrobras ADRs fell 11%, Itaú Bank dropped 13.65%, Bradesco fell 12.29%, and Vale lost 4.44%. Pretty much everything took a hit.
First, the strongest arguments for the bulls.
A 22.4% drop in one night is an emotional overreaction. After the 1-hour candle dipped to 32.23 at midnight last night, it recovered to close at 34.93—there were buyers waiting below.
More importantly, the funding rate is now negative 0.97%, settled every eight hours.
Put simply, shorts are paying nearly 2.9% a day. Chasing the short trade is like paying the bulls a wage, and the fuel for a short squeeze is already there.
There’s also an institutional factor: Lula’s coalition doesn’t have a majority in either chamber, so it can’t push through aggressive fiscal measures. A divided Congress itself acts as a brake.
The bears have a solid case too.
The positions betting on a change of government that drove October’s 13.87% rally have only been unwinding for one night. They’re nowhere near fully cleared out.
Brazilian real futures are still down 10%. Until the currency stabilizes, foreign capital will keep flowing out.
The fiscal numbers are also right there: public debt is 83% of GDP. If the government doesn’t quickly reaffirm its commitment to fiscal discipline, a widening yield curve will keep weighing on valuations.
A fund manager at ASA put it more bluntly: the market wasn’t positioned for this result at all, and another round of adjustment is likely at the open.
My view: I’ll call it a rebound, not a reversal.
The drop has already priced in the first wave of panic, and negative funding is making things tough for shorts, so the risk-reward for a rebound looks better than chasing the downside.
But I can’t call it a reversal yet. Two things still need to happen: whether the local Brazilian market can hold up after it opens, and whether the government makes a fiscal commitment.
Without those two things, a rebound is just a rebound.
The scenarios are simple.
If it holds above 37.6—the high of the overnight rebound—then the rebound is confirmed, with 42.55, the high before last night’s first wave of selling, as the next level to watch.
If it breaks below 32.23, last night’s low, then sentiment still hasn’t washed out. Next down is the psychological 30 level, with the 52-week low of 29.86 waiting just below.
I’m neither chasing the short nor buying the dip. I’ll wait for 37.6 to give me an answer.
Will shorts be squeezed back up to 37.6 by negative funding, or will it break below 32.23 and keep sliding toward 30?
I’m betting on the former. What about you?
$EWZ $PBR $VALE
#巴西大选 #EmergingMarkets
Bottom line first: I’m leaning toward a short-term rebound and recovery, but I don’t buy a reversal.
First, what happened?
The results of Brazil’s presidential runoff came in last night. Lula won 51.75% of the valid votes, beating Bolsonaro Jr.’s 48.25%, and securing a fourth term.
Reuters confirmed it too: the electoral court made the official announcement—it wasn’t a poll.
The market was clearly not prepared for this result.
On the day Bolsonaro Jr. led 47% to 45% after the first round, São Paulo’s stock index hit a record. EWZ had already gained 13.87% this month through Friday’s close.
In other words, this month’s rally was all a bet on a change of government.
Once the result was announced, the reckoning began.
Spot EWZ plunged 19.63% after hours, from 42.59 to 34.23.
Binance perpetuals were even worse: down 22.4% over 24 hours, with the price at 34.98 and a low of 32.23 last night.
Brazilian real futures fell 10% overnight, sending the implied exchange rate straight to 5.56.
Tokyo-listed ETFs linked to the stock index were also down 12.75% early this morning.
Petrobras ADRs fell 11%, Itaú Bank dropped 13.65%, Bradesco fell 12.29%, and Vale lost 4.44%. Pretty much everything took a hit.
First, the strongest arguments for the bulls.
A 22.4% drop in one night is an emotional overreaction. After the 1-hour candle dipped to 32.23 at midnight last night, it recovered to close at 34.93—there were buyers waiting below.
More importantly, the funding rate is now negative 0.97%, settled every eight hours.
Put simply, shorts are paying nearly 2.9% a day. Chasing the short trade is like paying the bulls a wage, and the fuel for a short squeeze is already there.
There’s also an institutional factor: Lula’s coalition doesn’t have a majority in either chamber, so it can’t push through aggressive fiscal measures. A divided Congress itself acts as a brake.
The bears have a solid case too.
The positions betting on a change of government that drove October’s 13.87% rally have only been unwinding for one night. They’re nowhere near fully cleared out.
Brazilian real futures are still down 10%. Until the currency stabilizes, foreign capital will keep flowing out.
The fiscal numbers are also right there: public debt is 83% of GDP. If the government doesn’t quickly reaffirm its commitment to fiscal discipline, a widening yield curve will keep weighing on valuations.
A fund manager at ASA put it more bluntly: the market wasn’t positioned for this result at all, and another round of adjustment is likely at the open.
My view: I’ll call it a rebound, not a reversal.
The drop has already priced in the first wave of panic, and negative funding is making things tough for shorts, so the risk-reward for a rebound looks better than chasing the downside.
But I can’t call it a reversal yet. Two things still need to happen: whether the local Brazilian market can hold up after it opens, and whether the government makes a fiscal commitment.
Without those two things, a rebound is just a rebound.
The scenarios are simple.
If it holds above 37.6—the high of the overnight rebound—then the rebound is confirmed, with 42.55, the high before last night’s first wave of selling, as the next level to watch.
If it breaks below 32.23, last night’s low, then sentiment still hasn’t washed out. Next down is the psychological 30 level, with the 52-week low of 29.86 waiting just below.
I’m neither chasing the short nor buying the dip. I’ll wait for 37.6 to give me an answer.
Will shorts be squeezed back up to 37.6 by negative funding, or will it break below 32.23 and keep sliding toward 30?
I’m betting on the former. What about you?
$EWZ $PBR $VALE
#巴西大选 #EmergingMarkets
