Brazilian financial markets rallied strongly on Thursday, with stocks hitting a fresh all-time high, on growing investor optimism that Congress will soon approve a comprehensive and weighty pension reform bill. The benchmark Bovespa stock market rose as much as 1.5% to a new high of 103,629.04 points, and the dollar fell more than 1% to as low as 3.7858 reais, its first dip below 3.80 since mid-March.
Interest rate futures fell across the curve, in many cases to new lows, as investors positioned for the central bank cutting its key policy rate in the event that uncertainty surrounding pension reform is lifted. The special pension reform committee in Congress is expected to vote later Thursday on a package that will generate savings of around 1 trillion reais ($264 billion) over 10 years, the upper end of most analysts' forecasts and exactly where Economy Minister Paulo Guedes has long aimed for.
"With the fiscal power of the current text very close to the 1 trillion reais defended by Paulo Guedes ... there's no reason why the positive sentiment around local assets shouldn't continue," wrote analysts at broker H.Commcor in a client note. Committee chairman Marcelo Ramos said voting on the text should begin later on Thursday. Approval at this juncture would pave the way for a full lower house plenary vote and approval before the lower house breaks for recess on July 18.
Thursday's rally to historic highs for stocks and bonds, and lows for market interest rates, caps a remarkable turnaround from earlier this year when pessimism surrounding pension reform and political infighting in Brazil was at its deepest. The dollar has fallen 8% since mid-March, also driven in part by a dramatic fall in US bond yields and interest rate expectations, while the Bovespa has risen 15% since mid-May.
But the picture is not all rosy. Not only is there scope for setbacks on the reform and political front, but the economy remains in the doldrums. Purchasing managers data on Wednesday suggested Brazil may have slipped back into recession, and Brazil's auto industry group Anfavea on Thursday slashed its 2019 vehicle export forecast to -28.5% from -6.2%.
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