Stock market today: Ibovespa retreats with Vale (VALE3) and weakness on Wall Street; dollar drops to R$4.97

ALIGNING EXPECTATIONS

The last week was highlighted by the statements issued by global central banks.

The Bank of Japan (BoJ), for example, began work with a major change, raising interest rates from negative territory after almost eight years, marking the first interest rate increase in 17 years.

The American Federal Reserve (Fed), in turn, calmed market concerns in the face of robust inflationary data from the beginning of the year, reaffirming the forecast of three rate cuts in 2024, but left it open when the cuts would begin.

Surprising everyone, the Swiss central bank began the cycle of interest rate cuts in Europe, while the Bank of England (BoE) signaled a significant transition, with two of its members previously in favor of increases opting to maintain rates, paving the way for cuts from mid-year onwards.

This Monday, Asian shares were relatively stable, with the market in anticipation of important imminent economic releases, especially after Japan’s Nikkei 225 retreated from the all-time highs recorded the previous week.

In China, the situation was less optimistic today, after the government instructed state entities to cease using chips from Intel and Advanced Micro Devices, in addition to flirting with abandoning Microsoft’s Windows operating system.

European markets started the day lower, followed by US futures.

The week will be shorter due to the Easter holiday, which interrupts market activities on Friday.

We are listening for any further clarification on the planned interest rate cuts.

Seeing…
00:54 — Signs in the minutes

This week, Brazil’s attention focuses on the imminent publication of the minutes of the Monetary Policy Committee (Copom), scheduled for tomorrow.

This document will shed light on the future direction of monetary policy determined by the Central Bank, an aspect that will be rigorously evaluated by market agents.

At its recent meeting, the BC decided to reduce the Selic rate by 50 basis points and, additionally, chose a more adaptable path for future decisions, adjusting its communication by removing the plural of “fforward guidance“.

Such an adjustment, although it does not completely eliminate the chance of further 50-point rate reductions after May, suggests a moderate expectation.

Additional elements, such as Tuesday’s IPCA-15 and Thursday’s Quarterly Inflation Report, will play a crucial role in refining projections for the terminal Selic, which I personally still forecast at 9%.

The external environment has exerted a determining influence on the Brazilian market, especially notable in the recent underperformance of commodity stocks and state-owned companies.

At the same time, at the domestic level, Brazil’s fiscal situation deserves careful observation.

Last week culminated with the officialization of a budget block, not a contingency (yet), of R$2.9 billion — below initial forecasts of R$5 billion. However, this measure was unable to assuage the market’s concerns, especially due to the lack of definition of how the government will face the imminent fiscal challenges.

This uncertainty means that the Central Bank is keeping open the possibility of additional post-May adjustments. In a context where fiscal stability remains uncertain, monetary policy is expected to play its role as a stabilizer (monetary rather than fiscal anchor).

01:47 — The pace of activity

In summary, the Central Banks of developed nations have shown a growing inclination to initiate interest rate reduction cycles from mid-year onwards, providing a sense of stability to financial markets due to the global interconnection of monetary policies.

However, regional differences regarding the implementation of these policies reveal peculiarities.

This week, shortened by the holiday, attention turns to the release of the PCE index for February, the Fed’s preferred index for measuring inflation, and the update of GDP data for the last quarter.

Furthermore, further statements from key figures such as Jerome Powell are eagerly awaited, whose comments could further clarify the future direction of monetary policy.

There is expectation for additional insights that can adjust market projections. For example, Fed senior Raphael Bostic suggested that a single rate cut would be enough for this year, raising doubts about the prevalence of his vision at the next meeting.

The challenge, similar to that faced in Brazil, is that new information could destabilize the expectation of three interest rate reductions throughout the year.

I maintain the view that there will be three cuts of 25 basis points, starting in June, followed by September and December.

02:36 — Adjusting

Recently, the European Union took a pioneering step by ratifying the first extensive legislation dedicated to artificial intelligence (AI), establishing security standards to circumscribe this advanced technology.

Scheduled to come into force in May, this regulation represents the culmination of three years of deliberations (preceding the ChatGPT era) and categorizes AI applications according to their level of risk, ranging from “unacceptable” (i.e. prohibited) practices to others considered low risk.

Violations of this law can result in severe penalties for corporations, including American technology titans.

Specifically, the new law prohibits the use of AI in ways that could infringe fundamental rights, such as facial recognition systems built from images obtained online or surveillance cameras, and programs capable of analyzing emotions in work environments.

Furthermore, AI-generated content is expected to be properly identified to prevent the spread of disinformation through advanced forgery, and that AI algorithms comply with European copyright regulations (with companies such as Microsoft and OpenAI facing significant legal action for alleged violations of these rights).

This legislative framework comes at a time when global authorities seek to regulate a technology that is evolving at a rapid pace. A considerable portion of European corporations have already implemented some type of AI, and around 27% of American citizens reported daily interactions with the technology in the last year.

Industry giants, such as Microsoft, OpenAI and Meta, actively participated in the legislative process, aiming to influence the format of these standards.

Previous EU regulatory initiatives have already imposed significant changes to the operations of American technology companies, marking this event as the beginning of an extensive and complex debate about the future of AI.

03:22 — The R-star

At last week’s meeting, the Federal Reserve maintained its outlook for 2024 but revealed a significant adjustment in long-term expectations for economic growth and interest rates, suggesting a more cautious approach to monetary policy in the years ahead.

As per Powell’s comments, the prevailing feeling is that interest rates will not return to the historically low levels experienced in the decade following the 2008 financial crisis.

This notion was reinforced by the Fed’s Summary of Economic Projections (SEP), which kept rate projections for 2024 consistent with previous ones but adjusted expectations upward for subsequent years.

The “dot plot,” which reflects Fed officials’ forecasts on key economic indicators, including interest rates, for the coming years, showed an increase in the medians for the federal funds rate target through the end of 2025. 2026, and beyond, each raised by 25 basis points.

This review points to a more gradual normalization of high interest rates, the highest in more than two decades in the US, with the target range for the end of 2025 adjusted to 3.75% to 4%, and for 2026, the 3% to 3.25%.

Officials’ medium-term projection suggests a target range of 2.5% to 2.75%, indicative of a higher breakeven rate (R-star or R*), in anticipation of strengthened economic growth and elevated inflation.

This expanded outlook suggests a Fed monetary policy adapted to a more robust and inflationary economic environment in the coming years.

04:15 — The attack

Russia is in mourning after the terrorist attack that killed at least 137 people last Friday in Moscow. Dozens of other people were also injured in the attack.

The massacre was claimed by the Islamic State, which also set fire to the concert hall complex with explosives.

It is worth remembering that, earlier this month, the US Embassy warned that an ISIS attack was imminent, after Russia said it had thwarted a planned attack on a synagogue.

The Russian government, for its part, is doing everything it can to shift the blame to the Ukrainians. Ukrainian authorities denied involvement, but oil rose due to growing geopolitical risk, already flirting with US$86 per barrel again.

The war in Ukraine is far from over, but tragedies like this can serve as an excuse for the Russian government to escalate the conflict.

We are heading towards a possible division of Ukrainian territory, something unprecedented in decades.