Brazil's Economy Is Quietly Surging

Brazil's economy is in the midst of an economic surge that too few are paying attention to. 

• Equity markets are breaking out of a multi-month base
• Inflation rates and prices are dropping rapidly across the board
• Fuel prices have plummeted 
• Unemployment rate has dropped to historic low levels since 2016
• Despite a massive increase in interest rates to 14% the economy is bullish

EQUITY MARKETS

Start with Brazil's ETF $EWZ, which reflects the IBOVESPA

Brazil markets are surging upwards 20% gain in the past 24 days just before the round 2 elections. Overall ETF is up +25% YTD.

A look at the US Markets shows the stark difference YTD

INFLATION

Inflation is dropping like a stone. Broad based inflation is down over 500 basis points or 39% since the beginning of 2022. Hovering around 7%.

Food costs peaked in July this year and continue to fall.

With lowering cost of fuels transportation costs have come down quickly as well.

Gasoline prices plummeted 39% since June 2022 which helps reduce price levels for food and transportation.

EMPLOYMENT & WAGES

The unemployment rate continues a year long slide to levels not seen since 2016. Employment has not been this strong in 6 years.

At the same time, monthly incomes showed a sharp increase and fall after the dispensement of a massive aid package, wages in 2022 have shown a rapid rebound back to pre-pandemic levels.

GROWTH

Is Brazil growing? Yes but slowly. Post pandemic GDP spiked then dropped off to more pre pandemic levels then slowed. The most recent measured quarter puts Brazil back to 2012 levels

Aguriculture continues to grow at a blistering pace.

Transportation sector surged back to 2015 levels.

The fly in the ointment is the shrinking manufacturing sector. 

SPX vs Yield Correlations in 6 Charts

Outlook

Yields may have peaked in the short term and stocks are looking oversold and back to prior lows. I'm expecting a short term bounce in the SPX and a pull back in Yields.

Assumptions:

Long treasuries

Long SPX

Short USD

Long Oil

SP 500 vs 10y Treasury Yield

The 10y yield has a negative correlation with the SP 500 in 2022. As yields skyrocketed, stocks tanked. Rates may even have been forecasting the pivot in July's rebound of the SPYs, pivoting almost 2 weeks before the equity markets.

 

Market breadth looks at all the stocks in the SP 500 and determines if they are broadly above or below their 50 period moving avg. Over the past 2 years it has been under 5% only 3 times, briefly. This indicates an oversold environment with a potential volatile snap back.

Mortgage Rates and Yields

30y rates blew past 6% looking to test levels all the way back to 2008. Rates have doubled since the beginning of the year.

Rates are closely correlated to the 10y Treasure yield. Chart below shows the 10Y Yield on massive 46% increase 

Rates have doubled in 2022

TNX has been ripping higher and is looking over extended.

The US Dollar is pushing on the resistance rail of a huge up-trending channel. Short term the dollar is likely to pull back reverting to the mean support trend line roughly on the 50ma.

Market Is Overheating In 5 Charts

 

SP 500 crossed into the zone between the 50-60% on the Fibonacci. This could be a battle zone for stocks. Consider the already 18% run since June lows. How much gas is left in the tank after that move? Might be an area for consolidation before moving higher. Any dip seems buyable. 

Breadth is showing it's significance. The 9 week run up from single digit percentage stocks has not been seen since the pandemic crash recovery. Now clearly running in the red, with over 90% of stocks above their 50ma. This has only happened 2 other times in the past 2 years.

VIX respectively heading lower below 20 given this rip higher in the SPX. We have not seen the VIX linger at low levels.

$UUP USD ETF - US Dollar is still in a clear uptrend. A strong dollar has not been good for stocks.

10y Yield - Yields are staying elevated off mid-June highs. TNX is also influential in mortgage rates. There may be an area of support it's sitting on. A drop in equities could mean a rise in yields.

3 Wednesday Trade Ideas

Three breakouts to watch. Lots of breakouts from bases. Using tight stops as this market will snatch back gains in a hurry. 

$ARLP High beta, high short ratio. This biotech broke out of a high base cup and handle formation. Look for an upside target of $26 or about 15% above current prices.

$URA Uranium woke up from a bottom base formation breaking above $20 on substantial volume. Look for an upside target of $24 or about 13%

$WM Waste Management broke above the 200ma for the first time since June. An upside target of $170 would be a 6% gain approximately. 

5 Charts That Are Working

All stock holding their uptrend. 500k avg volume.

 

Shipping. ZIM with phenominal EPS growth rate. This volume pop suggests strong momentum to the upside as the industry enjoys high rates to meet its high demand.

Oil/Gas. With oil prices skyrocketing oil exploration services are strong. Testing its breakout level on high volume indicates it could sustain at this level and if oil continues to climb this moves with it.

Tech, still in long term uptrend. Historically at a buying point. However market conditions are significantly different than the previous 3 opportunities. 

Selling off since november forming a downward wedge. Volume spike suggests a squeeze. Potential reaction to recent events.

Kroger with a huge pop on earnings on big volume. Bull flag suggests a potential bullish move to the upside is possible.

SP 500 Week in 2 charts

Option markets have the odds of reaching 4000 at 59% in next 30 days or by Easter.

 The week was largely range bound finding resistance 3x at the a 4320 area.

Friday's action started with a pop on "good progress news" from Russia but immediate sold off hard. 

A break below 4138 could mean much low prices to come. 

Insane Week In 2 Charts

1. Wheat Prices Explode

Oil prices are more talked about but wheat prices exploded this week. Reaching highs that eclipse the great recession prices of Feb 2008, prices skyrocketed 50% in a single week as a result of the invasion by the largest wheat producer in the world Russia of the next highest wheat producer Ukraine. 

With so few wheat producers in the world, it is of great concern when 2 of the 5 are at war with each other. Russia and Ukraine account for roughly 30%of the world's wheat exports*

*Source: Tranding Economics

As a result of the invasion prices exploded this week and up 50% YTD

A conflict between the largest global suppliers is spreading fear that supplies will run short. Wheat prices have already been historically high due to drought conditions. Now such a dramatic increase in prices can create a supply shock resulting in food shortages amongst the poorer of wheat importers.

2. Crude Oil Prices

The conflict this week also sparked global supply crunch and tightening of prices even though sanctions have not officially hit the Russian oil industry. 

Prices this week reached 2008 recession levels.

In 3 days the price of Crude skyrocketed 23% holding prices elevated to close the week.

Gas prices followed suit this week especially in California where drivers have an abundance of taxes on top of already high prices.

US Avg gasoline prices are now at peak levels during the worst of the 2008 recession