Brazil's markets deteriorating on rising uncertainty

Brazil's economy contracted in the 3d quarter for the first time since the Great Recession. This was not entirely unexpected, though the drop was worse than economists had estimated.

Reuters: - Brazil's economy contracted in the third quarter for the first time since early 2009 as a steep drop in investment showed flagging confidence in what was recently one of the world's most attractive emerging markets.

The economy shrank 0.5 percent between July and September from the prior three months, government statistics agency IBGE said on Tuesday, missing forecasts in what has become a disappointing routine over the last three years. Gross domestic product had been expected to drop 0.2 percent, according to the median forecast of 40 economists polled by Reuters.

The weak quarter reinforced a dimming economic outlook for Brazil, which has struggled to contain inflation and stay competitive in recent years, tarnishing the reputation earned with a decade of robust growth.

All that wonderful government stimulus the Rousseff administration poured into the nation's economy recently has done little to rejuvenate growth. At the same time its withdrawal, combined with the Fed's taper, could create some serious headwinds for Brazil going forward.

Reuters: - The tax breaks and cheap loans unleashed by Rousseff have yielded meager results, and their withdrawal is now clouding the outlook for carmakers and furniture factories.

Public spending grew 1.2 percent in the third quarter, the economy's strongest driver of new demand, but officials have warned there is no room for more stimulus as tax revenues dry up and the government misses budget targets.

That leaves Rousseff without much fiscal firepower at the end of her first term. Next year promises to be a handful for the president, as she juggles preparations for hosting the World Cup, skepticism from business leaders and a likely withdrawal of monetary stimulus in the United States.

Some were hoping that the fourth quarter will bring better news, as October seemed to show improvements for the nation's manufacturers. But the latest data from Markit suggest that is not the case.

Markit: - The HSBC Brazil Manufacturing PMI fell to 49.7 in November, from 50.2 in October. After contracting at the margin for the entire third quarter, economic activity in Brazil’s manufacturing sector was unable to sustain October’s rebound and fell back below the 50 mark. Firms reported that output continued to climb, but at a slower pace than in October, while other key components such as new orders and employment all lost momentum.

With the 2014 general elections coming up and economic conditions deteriorating, the markets have been pricing in a difficult year ahead. The fact that the upcomong FIFA World Cup could bring massive and possibly violent protests is not helping. The nation’s equity market has underperformed materially against both the global and emerging indices, down over 17% for the year.

Blue: Brazil BOVESPA, Green: iShares EM Index ETF

What's particularly troubling is the sharp increase in long-term interest rates, as investors dump domestic government bonds. The 10-year rate broke 13.25% today.

Source: Investing.com

Some consider this a buying opportunity. Perhaps. Given such tremendous uncertainty however, it may be some time before Brazil's debt and equity markets begin to recover. 

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