Brazilian markets have gotten a boost over the past few months in part due to on-going speculation that President Dilma Rousseff could be forced out of office.
Since the end January 2016, the real is up about 12.2% and the Bovespa has rallied a boggling 39%.
And this makes sense, analysts argued, because should Rousseff be forced out, that could finally bring the country’s long-lasting political crisis to an end.
However, somewhat unexpectedly, the markets didn’t follow the usual course of action after the most recent impeachment proceedings.
On Sunday, Brazil’s lower house of Congress voted to begin impeachment proceedings against Rousseff, but the markets mostly yawned it off. The initial rally in the real reversed quickly, and the Bovespa closed down by 0.6% to 52,894.08 for the day.
One could argue that nothing really moved because everyone basically already expected the lower house to pass the motion to begin impeachment proceedings.
However, in a recent note to clients, Capital Economics’ David Rees presented another idea: it’s actually all about commodities.
“As we have pointed out in the past, commodity prices have been the driving force behind Brazilian markets. This still seems to be the case,” he argued.
Perhaps most notably, Rees points out that oil prices fell on Monday after the Doha meeting flopped on Sunday.
“Whatever the reason, we suspect that the best days are now behind Brazilian markets. For a start, commodities are unlikely to offer much more support. We forecast that iron ore prices will fall back during the course of this year to about $45 per tonne. And with a deal to cap oil production highly unlikely, our forecast remains that the price of Brent crude oil will end the year at around $45 per barrel,” he continued.
Moreover, even if Rousseff is impeached, that doesn’t mean that Brazil’s splintered government is going to automatically adopt a more market-friendly posture, adds Rees. So, that, too, isn’t a super sign for the country.
“The upshot is that we do not think that equity prices will rise much further,” concludes Rees. And “we would not be surprised to see the real weaken further against the dollar in the months ahead.”