Are We Facing a Bear Market Rally?

Global securities markets continue to enjoy a positive momentum. A marked increase in global risk appetite has fuelled a bullish period in emerging-market economies which has yet to find strong signs of resistance. In fact, USD-denominated emerging-market bond indices have recovered, in several cases such as Brazil and Mexico, pre-September 2008 levels. Equity securities within the BRICs (Brazil, Russia, India, China) group have undergone a strong recovery since early March. In Latin America, most floating currencies have been in appreciating mode since early March, with the clear exception of Argentina, where the peso continues to be under increasing pressure for further devaluation alongside rising default risk.

As for the health of the US economy, a further reduction in housing starts in March together with the bankruptcy of the second largest shopping mall owner reminded global investors of the sustained weakness present in the US real estate
market. Meanwhile, market participants are eagerly awaiting the outcome of the stress-test exercise, which the US Federal regulators imposed on 19 US-based financial institutions; the results are due in early May.

In Brazil, the early signals of normalization in local credit and fx markets have raised confidence that the country might be returning to growth. The government’s aggressive fiscal stimulus, as seen in the reduction of the primary surplus target to the 2.0% of GDP range from 3.8%, is playing an important role. These developments led us to remove part of the monetary easing we were forecasting previously. We now anticipate a 100bp cut in the April 29 COPOM meeting and are maintaining the call for a 50bp move at the June 10 meeting, leaving the Selic rate at 9.75% in 2009.