Declining Brazilian Stocks Drive Down Emerging Market ETFs

Joel Anderson  |

Shares in prominent emerging markets ETFs declined sharply on Tuesday after Brazil reported economic data showing that its economy contracted in the third quarter for the first time since 2009. Brazil’s Bovespa index declined for the second straight day, falling about 1.75 percent.

The prominent emerging market ETFs slipped Tuesday after Brazil’s continued slide. The iShares MSCI Emerging Markets Index ETF (EEM) fell over 0.5 percent today on very heavy volume, combining with yesterday’s 2 percent slide to put the fund down almost 2.75 percent in two days. The iShares MSCI Brazil Index ($EWZ) plunged over 1.5 percent, bringing its losses this week close to 5 percent, and the iShares FTSE China 25 Index ETF (FXI) fell over 1.15 percent for a two-day loss of almost 2 percent.

Brazil’s economy shrank 0.5 percent from the second quarter to the third quarter of 2013, the first such decline since 2009. It was, however, a 2.2 percent year-over-year increase. The country’s statistics bureau attributed the decline to a 3.5 percent decrease in agricultural output.

The decline in the Bovespa index came a day after it fell 2.36 percent to make the two-day loss just over 4 percent. The index fell below 51,000 for the first time since early September.

"The (GDP) results caused the index to worsen a bit today, but the fact of the matter is that the market has already priced in this poor internal (economic) scenario," said Leme Investimentos analyst João Pedro Brugger.

While the economic data is a contributing factor, the bigger driver appears to be the decision by Petroleo Brasileiro Petrobras ($PBR) to allow domestic fuel prices to gradually return to the same levels as international prices. The company bucked expectations, though, when it failed to disclose how it was calculating prices, prompting a negative market reaction as the company’s stock declined almost 11 percent on Monday.

Shares fell almost 0.75 percent Monday, prompting speculation that international investors seeking a deal were buying up Petrobras and helping prop up the Bovespa against even more dramatic losses.

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