Dollar surpasses all investments in April. What will be the star of May?

The month of April was marked by a worsening of market sentiment in relation to macroeconomic fundamentals in Brazil and abroad. For those who have followed the wave of pessimism, it is not a surprise to learn that the worst investments of the fourth month of 2024 were those of variable income – including those that were experiencing a significant increase in the year.

Data collected by Einar Rivero, founding partner of Elos Ayta Consultoria, shows that the Bitcoin had the worst performance among major investment assets in April. Indices linked to shares – IbovespaIDIV, Small Caps – also had a negative month, as did the IFIX, real estate fund index (FIIs). On the positive side, the dollar and euro stand out.

The context that explains a large part of these performances is just one: data from inflation higher than expected in U.S led the market to reprice the beginning of the interest rate cut cycle there, from June or July to September. As a result, there was a general risk aversion movement that penalized global markets.

Even Bitcoin, which was on a significant upward trajectory in 2024, suffered. The main cryptocurrency of the market fell 11.32% in the month in which it made the long-awaited halvinga mechanism that, from time to time, halves the rewards to the asset’s miners.

The event was seen by many experts as something that would make crypto soar – as was actually happening –, but the halving was not enough to stop the pessimism that took over the market in April. “The change in the expectation of the beginning of the fall in the American interest rate had a negative impact on risk assets globally, damaging market sentiment in relation to Bitcoin”, highlights Vinicius Moura, economist and partner at Matriz Capital

Dollar up, stock market down

The worsening of sentiment towards the USA also explains the negative performance of the Brazilian market in the period. With the prospect of higher interest rates out there for longer, part of the market began to revise upwards projections for the Selic at the end of 2024.

“This ended up influencing our market as well, with agents starting to price a slower pace in the Selic cuts, already putting into doubt the size of the cut at the May meeting, which was previously priced as certain -0.50%, now became a possible cut of -0.25% will be priced”, highlights Andre Fernandes, head of variable income and partner at A7 Capital.

Read more: XP revises 2024 projections to include pessimism with Fed and Selic

Here, however, there was yet another factor playing against risky assets. In April, the federal government revised the fiscal surplus target from 0.5% of GDP in 2025 to zero deficit. For some market agents, the change buries the new fiscal framework, which was no longer as popular among economists and analysts due to its dependence on increased revenue, without the counterpart of spending cuts.

Fiscal instability, added to the more uncertain scenario abroad, led to a long interest curve opening in the country. we show here, Treasury Direct bonds were once again traded at a “crisis interest” level. “A doubt arose regarding the country’s GDP debt, thus leaving little room for the Central Bank to continue cutting interest rates in the second half of the year”, explains Rodrigo Fonseca, specialist at the variable income desk at RJ+Investimentos.

A bad scenario for handbag and Ibovespa, but worse for those smaller, more leveraged companies, which depend more on the interest cycle in their operations. “That’s why the index Small Caps had the worst performance in April, as it has an inversely proportional relationship to the long interest curve”, says Fonseca.

If the year 2024 was already being marked by the sudden exit of foreign capital from the Stock Exchange, with the fiscal uncertainties here and the scenario abroad of rising interest rates and geopolitical conflicts, the foreigners disappeared for good. As of April 26, the most recent data provided by B3, the Brazilian Stock Exchange had lost R$32.5 billion in foreign investment.

The exit of dollars the market was already unbalancing the exchange rate, but the situation worsened in April; which explains the 3.51% increase in the dollar and 2.37% in the euro in relation to the real in the period. On the day the fiscal target was revised, on April 16, the American currency reached a peak of R$5.27, the highest value since March 2023. “The change implies a commitment to zeroing out the government’s primary deficit only in 2026, the last year of the government. Obviously, this had a negative impact on the market, reinforcing the existing fiscal risk in relation to national accounts, which was one of the main risk aversion factors that contributed to the appreciation of the dollar between 2015 and 2016. “, explains William Castro Alves, chief strategist at Avenue.

What to expect in May

As we showed in this other report, little by little the market has revised estimates for the rest of 2024. Those projections that, at the turn of 2023 to 2024, placed the Ibovespa at around 140 thousand or even 150 thousand points seem to be postponed until the Federal Reserve effectively starts the interest rate cut cycle. This means that, with the factors that are on the table today, the Stock Exchange could continue to move sideways.

The general understanding is that macroeconomic conditions will continue to be a crucial factor. Improvements in global economic conditions or a stabilization in monetary policies could lead to a more favorable environment for risky assets.

Other than that, the one that seems to have the most reasons to rise again in May is Bitcoin, highlights Vinicius Moura, from Matriz Capital. “Despite the drop in April, Bitcoin is still showing a significant increase year-to-date, indicating that there is still strong interest and potential for recovery. The halving could continue to be a catalytic event for price increases, as it has historically reduced supply of new bitcoins, potentially increasing the price”, he says.