Where China goes, will Brazil follow?
08/24/17

First came China, and now traders are turning their sights on another major emerging market.

Brazil, it will be recalled, put the B in BRIC–that famous acronym coined in the midst of last decade’s surge in global stocks. (Followed by Russia, India, and China.) The trend hit its peak between 2005 and 2007 as international growth surged, only to peter out in 2011. Then it was out of sight and out of mind for most investors–that is until a few months ago.

China led the BRIC stampede initially as its economy improved and Beijing let the yuan appreciate. Traders were especially enthused with e-commerce rock stars like Alibaba (NASDAQ: BABA) and Weibo (NASDAQ: WB). More recently attention is shifting to the metals consumed by the country’s hungry factories and construction projects.

That’s where Brazil comes in…in particular the Rio de Janeiro-based mining giant Vale (NYSE: VALE), which just happens to produce iron ore…and copper…and nickel…and coal…pretty much everything its customers across the Pacific can’t get enough of. Yesterday traders gobbled up a block of 15,000 VALE December 11 calls for $0.46 in one of the session’s largest transactions.

Calls fix the price where a security can be purchased, so they can appreciate much more quickly than the stock should a rally occur. Wednesday’s contracts, for instance, will double if VALE climbs 17 percent to $11.92 by expiration and triple from a 21 percent move to $12.38. On the other hand, they’ll expire worthless if the shares remain below $11. Breakeven is at $11.46. VALE rose 3.20 percent to $10.32.

Vale (VALE) 8/25/16 - 8/23/17 chart

Source: OptionsHouse by E*TRADE

The trade came just one day after apparently bullish activity was detected in aluminum giant Alcoa (NYSE: AA) and copper producer Freeport-McMoRan (NYSE: FCX). It also occurred against a backdrop of increasingly positive news as metal prices rise, earnings beat the street, and financials in the space turn healthier.

But wait, there may be even more. What if Brazil is finally turning around after 10+ years of political chaos? That’s a question some investors may be asking on the heels of two headlines this week:

  • “Brazil predicts approval for fiscal targets on Aug. 29 after budget compromise."1 What? Brazil is going to balance its books before the U.S.? Wow didn’t expect that one. (Or maybe we did.)
  • “Electrobras Stock Up 36% In U.S. On Brazil Privatization.”2 Sure maybe you’ve never heard of Centrais Eletricas Brasileiras SA (NYSE: EBR), known to friends and family as Eletrobras. But the news was taken as a sign of a pro-business shift in a country that’s treated investors like fourth-class citizens for a long time.

EBR averages fewer than 10 options contracts per session in the last month, so it may not be an ideal instrument for traders. But there are a handful of active names in the country:

  • VALE, cited above, typically has turnover close to 24,000 contracts.
  • Petrobras (NYSE: PBR): The oil driller averages 18,000 contracts per session. It also has plans to start production at a key field next month and is in the process of spinning off a fuel-distribution business.3
  • Itau Unibanco (NYSE: ITUB): The country’s top lender averages 3,700 contracts a day, and has been rising on hopes of improving profitability.4

Bottom line: Some folks are worried about NAFTA and troubles in Venezuela, but seasoned traders are honing in on Brazil.

 

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1. Reuters: Brazil predicts approval for fiscal targets on Aug. 29 after budget compromise. 8/22/17.

2. Barron's: Eletrobras Stock Up 36% In U.S. On Brazil Privatization. 8/22/17.

3. Reuters: Exclusive: Citigroup tops bank group for Petrobras unit IPO - source. 8/18/17. Petrobras says test production in Libra area to start in weeks. 8/22/17.

4. Reuters: Itaú's credit ROE may surpass cost of capital, CEO says. 8/1/17.