Spotlight moves from the euro zone to the USA
In August, we foresee the financial markets moving their attention from the euro zone to the USA. We also expect China not to have much influence on market performance this month. The results of the bank stress test released in July seem to have calmed the market and caused fears of bankruptcy to fade. The data did not indicate that problems are over, but left the feeling that they are under control with the adjustments made so far. On the other hand, the hopes that the US economy would gain momentum have diminished after the FED’s Presidential speech at the end of July. Given this, we believe that published economic data are likely to drive the market, as they will give a better idea of trends. However, as we do not foresee any data released this month as important enough to change expectations, we believe the market is likely to move sideways.
Last month, we foresaw a volatile market with no trend for July and based on this belief, compiled our portfolio with a defensive view. Despite this estimate, the market did rally and our portfolio followed the trend, demonstrating that it was able to perform well in upward as well as volatile movements. For this reason, we decided that, as we do not identify any definite catalyst driving the market in August, we would change our portfolio very little and continue our defensive view. We have reduced the weights on Bradesco and Hering (from 10% to 5% each) due to their recent stellar performance. We have also substituted Tietê for Eletropaulo, with the same weight, and added Telesp.
Focus on slowdown of US economy
The latest indications of a slowdown in the US economy point to a 2.5% GDP growth for 2010, from a previous 2.7%. This reduction, although immaterial, cooled down previous expectations of upward revisions in estimates and turned attention to stimulating growth. On August 10, attention should focus on the FOMC meeting to see if a change in the monetary policy is possible. However, with interest rates already close to zero, there is probably little to be done on this front. Monitoring the labor market (unemployment and payroll) is perhaps the best hope for investors to find economic improvement.
The real start of the Brazilian Presidential race
On August 17, presidential candidates will start their TV campaigns. Although candidates have been campaigning on the road for a while, many people see TV campaigns as the most important and decisive part of the presidential race, so voting polls that start after this are closely followed and should affect the market. Another potential source for market stress is the end of the low inflation period (last two months, caused by food prices) that we foresee for August. Although we expect inflation to remain at around 0.4% per month until December, people may view any rebound negatively.
Source: BANIF – IXE, 02.08.2010