Oil jump pressures Brazilian assets
Claudio Pires, da MAG
Leo Pinheiro/Valor
The surge in oil prices put fresh pressure on Brazilian assets on Wednesday (8), reviving concerns that a new supply shock could complicate the inflation outlook and keep interest rates higher for longer. The benchmark Ibovespa stock index fell 0.79% to 170,653 points, while futures rates rose, with stronger pressure on intermediate maturities. The exchange rate per U.S. dollar ended little changed at R$5.14.
The move followed a sharp rise in Brent crude, which again approached $80 a barrel as geopolitical tensions worsened. In Brazil, the main immediate effect was a repricing of inflation risk in the yield curve. The January 2031 Interbank Deposit (DI) contract rose to 14.48% from 14.38%, reflecting renewed concerns that higher oil prices could make monetary easing more difficult.
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Still, the reaction in domestic assets was more contained than at the start of the conflict, when the oil shock was more intense and Brent briefly traded above $120 a barrel. Eduardo Carlier, co-head of Azimut Brasil Wealth Management, said the market had already adjusted to a less accommodative monetary-policy outlook.
“In the first impact, when the market realized the war would last longer than expected, investors started to work with a less accommodative monetary-policy cycle. This time, that scenario was already priced in,” he said.
Brazilian rates react
Carlier also noted that the recent easing in oil prices, which had taken the commodity back close to prewar levels, was not matched to the same extent by other assets. In his view, that helped limit the reaction in other asset classes, even as the conflict escalated again.
In Brazil, Claudio Pires, chief investment officer at MAG, sees the Central Bank as willing to maintain a gradual monetary-easing cycle and less inclined to react to short-term shocks. He said the decision to extend the relevant policy horizon and maintain Selic cuts, even in an environment of high uncertainty, helps explain why futures rates reacted less sharply on Wednesday than they did at the beginning of the conflict.
The concern, however, is that a new oil shock could add inflationary pressure and make the global monetary backdrop more difficult. Pires said the possibility of disruptions to oil flows through the Strait of Hormuz remains the main focus for markets.
“Clearly, the United States wants to end the war with some gains, while Iran has made this stage more difficult,” he said.
Pires stressed that the current episode is a supply shock, with oil prices rising quickly, and that it could harden the stance of major global monetary authorities.
“Today, central banks, especially in developed countries, are not as lenient on inflation as they were during the pandemic. They seem much more prepared to fight this type of supply shock.”
Inflation fears
Brent crude for September delivery closed up 5.2% at $78.02 a barrel, near its highest level since the provisional ceasefire. U.S. benchmark WTI for the same month rose 4.37% to $73.52 a barrel. In after-hours trading, after the United States announced new attacks on Iran, Brent climbed as high as $79.48, once again moving toward the $80 range.
At the most critical point of the session, Brent briefly surpassed $80 a barrel afterPresident Donald Trump said the ceasefire between the United States and Iran was over. The rise in the commodity led investors to rebuild inflation concerns into asset prices, pushing global rates higher, while stock markets fell and the dollar remained broadly stable—moves that were also reflected in Brazil.
The escalation in tensions between the U.S. and Iran increased global risk aversion as the rhetoric between the two countries intensified. On Tuesday, attacks attributed to Tehran in the Strait of Hormuz led Washington to retaliate by revoking the license for the sale of Iranian oil, increasing volatility in the commodity.
Early Wednesday, Trump said the memorandum of understanding signed with Iran had ended, threatened new attacks, and said he could reinstate a blockade on Iranian ports.
Signs of supply strain
Since investors became aware of the rise in tensions between the U.S. and Iran, oil markets have begun to show distortions that had been removed from prices after the start of the ceasefire. Spreads between contracts for immediate delivery and physical prices saw strong demand, meaning the market began paying more for oil available now a sign of worsening sentiment and concern about the possibility of a new supply disruption.
Scott Chronert, chief U.S. equity strategist at Citi, said Wednesday’s jump in oil prices interrupted the downward trend seen over the past month and made the market’s reading of the end of the ceasefire one of the main points of debate. For now, he said, Citi is treating the move as a short-term reversal.
Even with the sharp rise in oil, the repricing effect on risk assets was much more limited than in the first months of the conflict.
Global rates move higher
In Pires’s view, the outlook reduces the room for interest-rate cuts in the United States and reinforces the Federal Reserve’s more hawkish bias, reflected in Kevin Warsh’s arrival at the helm of the U.S. central bank, with the message that the Fed is ready to bring inflation back to the 2% target.
As the correlation between global interest-rate markets and oil prices returned, investors again increased bets on higher U.S. rates. Treasury yields rose during the session: the two-year T-note yield climbed to 4.23%, from 4.19% at the previous close, while the 10-year yield advanced to 4.57%, from 4.55%.
