From record to casualties, what is happening with the Ibovespa in 2021?

In the first week of January, a new maxim. Two weeks later, three consecutive days of decline — understand the explanation for the Ibovespa in 2021.

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The behavior of the Ibovespa, the main asset index of the Brazilian stock exchange, since the beginning of 2021 has attracted attention: in the first week of the year, on January 7, it reached a new record high, reaching 125,000 points — the maximum valuation of the shares that are part of the index, without considering exchange variations and inflation.In the following week, however, it began to accumulate declines: on Friday, January 21, the Ibovespa registered its third consecutive fall and closed the day at the lowest index of 2021.

The Ibovespa serves as a “thermometer” for B3, the Brazilian stock exchange. As it gathers the main indices traded on the stock exchange, its highs and lows are a reflection of the main movements in the market.

But there is an explanation for this stock market behavior — from the record recorded in the first week of the year to the falls last week.

The rise of the Ibovespa

The rise in the Ibovespa between the beginning of November and the first week of January can be explained by the appreciation in commodity prices: the market, since last year, has been more favored for exports of these items, which boosted the shares of Brazilian companies that work with some of these commodities — and it has even led to higher food prices.

As a reminder: commodities are global consumer goods and, therefore, are traded all over the world on stock exchanges – countries that produce a certain commodity export it to other countries and its trade is global. Coffee, soy, wheat, oil and sugar are some examples of commodities, among many others.

And why is the commodity market so favored?

Since last year, the economic crisis resulting from the Covid-19 pandemic has led governments to implement expansionary policies, reducing taxes on commodities; in addition, the pandemic caused the production of many commodities to be reduced, while demand grew, again creating an opportunity for the Brazilian market to export.

At the beginning of the year, what drove the stock market higher was the increase in the price of iron ore. With the recovery of the Chinese economy , the first to show signs of recovery in the pandemic at first , demand for it increased — and large Brazilian producers had their shares appreciated.

Overall, raw material prices rose at the beginning of the year. A possible new boom in commodities on the world market was even discussed . In 2000, the first boom, which represented this increase in the prices of goods, was due to an increase in Chinese demand and questions about the supply of commodities.

And the Ibovespa drop?

The pandemic is also one of the factors that led Ibovespa to a bearish scenario. The increase in Covid-19 cases in Brazil, together with the lack of market perspective on the vaccination schedule, has raised questions about possible new expenses in the country to deal with this scenario.

In addition, the international scenario also worries investors. Large markets, such as the United States and England, adopted measures that reinforce the isolation (lockdown) – and, in general, the fall of international stock exchanges pressured Ibovespa shares down.

And, if in early January there was a rise in commodity prices, driven by the Chinese market, the following week they fell: the number of Covid-19 cases increasing in the country led to a drop in ore prices and, consequently, of exporting companies. Some of these companies are the ones with more weight on the Ibovespa and, when their share price drops, they tend to pull the index down.

And from now on?

It is still too early to say whether these Ibovespa lows are a sign that the optimism of the end of 2020 is over.

At the Copom meeting on January 20, in which it was decided to maintain the Selic rate at 2%, the Central Bank cited “high uncertainty” in the economic environment – ​​but acknowledged that there is growth in activity. The best alternative, at the beginning of the year, is to wait.

 

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