Market Overview

Wednesday's Other Rate Cut And The ETF That Could Benefit

Wednesday's Other Rate Cut And The ETF That Could Benefit

On Wednesday, the Federal Reserve lowered interest rates by 25 basis points, but it wasn't the only major central bank trimming borrowing costs.

What Happened

The iShares MSCI Brazil Capped ETF (NYSE: EWZ), the largest exchange traded fund dedicated to Brazilian equities, traded slightly higher in Wednesday's after-hours session after the central bank there pared the benchmark Selic rate by 50 basis points to 6%.

That was Banco Central da Brasil's first rate cut in over a year, one that its equivalent of the Federal Open Market Committee arrived at in unanimous fashion. The move comes after the International Monetary Fund recently lowered its 2019 forecast for GDP growth in Latin America's largest economy to just 1%.

Why It's Important

The $9 billion EWZ, which tracks the MSCI Brazil 25/50 Index, is up 19.35% year to date, or about double the gains of the MSCI Emerging Markets Index. The ETF has surged off its mid-May lows and benign inflation in Brazil could set the stage for more rate cuts.

“The Copom's inflation projections in the scenario with interest rate and exchange rate paths extracted from the Focus survey stand around 3.6% for 2019 and 3.9% for 2020,” according to Copom, the Brazilian answer to the FOMC. “This scenario assumes a path for the Selic rate that ends 2019 at 5.50% p.a. and remains at that level until the end of 2020.”

EWZ holds 55 stocks, about half of which hail from the financial services and materials sectors. The energy and consumer staples combine for about a quarter of the ETF's weight.

What's Next

While Brazilian stocks are trading higher this and rates there appear poised to decline, risks remain to both bullish and bearish predictions.

“The Committee emphasizes that risks around its baseline scenario remain in both directions.,” said the Copom. “On the one hand, (i) the high level of economic slack may continue to produce lower-than-expected prospective inflation trajectory. On the other hand, (ii) a possible frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation over the relevant horizon for the conduct of monetary policy. Risk (ii) intensifies in case of (iii) reversal of the benign outlook for emerging economies. The Committee acknowledges that the balance of risks has evolved favorably, but risk (ii) still prevails.”

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