Dollar Plummets as Tax Reform and Copom Attack Ignite Remarkable Stock Market Surge
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The Brazilian Stock Exchange, also known as the Bolsa de Valores, experienced a significant boost on Wednesday, November 7th, reaching a record high. This surge was mainly attributed to the optimism surrounding domestic economic conditions, which prompted investors to focus their attention on Brazilian stocks. The primary indicator of the stock market’s performance, the Ibovespa, closed the trading day with a 0.69% increase, surpassing the 119,000-point mark.
During the previous trading session, the Ibovespa had already shown a slight growth of 0.23%, reaching 118.4 million points. However, it was on Wednesday that the market witnessed a notable event that contributed to this remarkable rise. The Senate Constitution and Justice Committee (CCJ) approved Senator Eduardo Braga’s amendment to the tax reform bill. With twenty votes in favor and only six against, Proposal to Amend the Constitution (PEC) No. 45/2019 received the green light. This development marked a significant step forward in the government’s efforts to reform the economy.
Having submitted the manuscript on October 25, the author allowed the commission members two weeks to review it thoroughly before the vote. On Tuesday night, President Luiz Inácio Lula da Silva met with Senate and cabinet leaders to discuss the details of the impending vote. The government has prioritized the task of economic reform, making it one of its main objectives for the year. The PEC had already been approved in two rounds by the Chamber of Deputies earlier in the year, and now it was heading to a vote in the full Senate on Thursday.
Meanwhile, investors were also reacting to the release of the minutes from the most recent meeting of the Comitê de Política Monetária (Copom) of the Banco Central (BC). This meeting had taken place the previous week, and its outcome revealed a 0.5 percentage point reduction in the basic interest rate (Selic). The rate now stood at 12.25% per year. The Copom’s latest minutes indicated that monetary authorities were primarily concerned about the government’s ability to meet its fiscal targets. Efforts towards structural reform and fiscal discipline were seen as crucial, while any deviation from such measures, coupled with an increase in targeted credit and uncertainty about the stabilization of public debt, could raise the economy’s neutral interest rate. This, in turn, would have negative effects on the effectiveness of monetary policy and the overall economy.
The positive performance of retail-related stocks played a significant role in driving the early gains of the Ibovespa. Among the stocks that contributed to this surge, Magazine Luiza stood out with a nearly 23% increase, building on the gains observed in the previous week.
The devaluation of the Brazilian real was partially attributed to the positive news concerning interest rates. The Selic rate cut by the Copom, along with the decision of the Federal Reserve to maintain interest rates in the United States at their previous level, had a downward pressure on the value of the real. Although the current U.S. interest rate is the highest it has been in 22 years, it remained unchanged for the second consecutive meeting of the Federal Open Market Committee (FOMC).
Closing the trading day, the US dollar had weakened against the Brazilian real on the Bolsa. With a 0.25% decrease, it was trading at R$ 4.875. Overnight, the dollar continued its downward trend, dropping 0.16% to R$ 4.887, reaching its lowest level in more than a month. Overall, the currency has experienced a decrease of 3.29% this month and 7.64% throughout the year.
The combination of the tax reform bill’s progress, the Copom’s decision to lower interest rates, and the devaluation of the dollar contributed to the overall positive sentiment in the Brazilian stock market on Wednesday. Investors welcomed the domestic economic conditions and displayed confidence in the future outlook of the country’s economy. As a result, the stock market reached new heights, with record-breaking performances that propelled the Ibovespa to surpass the 119,000-point mark.
