Brazil’s biggest stock fund fell about 24% on Monday.
Going into Sunday’s runoff, the market put an 80% probability on the far-right candidate winning the presidency. He lost. By Monday morning, people all over X, and even major financial media, were talking about how wild and unprecedented it was.
No, it was a one in five chance. A 20% chance of winning isn’t crazy.
The Crazy Part
The crazy part is the 25% drop. A lot got baked into Brazilian stocks on the idea that the far right was going to boost the economy.
The markets didn’t like it. People get too caught up in the politics, and it doesn’t matter what I think.
How often do you see an entire country’s market down 24% to 25%? You hardly ever see it.
I had sold an out-of-the-money spread in the iShares MSCI Brazil ETF, or EWZ, a trade that pays you up front and keeps the money as long as the price stays away from your strikes. Monday morning, I could buy it back for a penny and be out.
The Best Form Of Price Discovery
Brazil’s exchange has circuit breakers, rules that halt trading when prices fall too far, too fast. EWZ trades in New York, and it doesn’t have them.
So EWZ is where price discovery happens, which is the process of buyers and sellers finding the real price. By mid-morning, 75 million shares and 260,000 option contracts had traded. Even if you’re a trader on the Brazilian exchange, you’re using EWZ as your primary hedge while your own market sits halted.
It’s awesome to watch this play out. The marketplace finds efficiencies, even on a day like this.
A 90% Chance We Do Nothing
The market gives the Fed a 90% chance of doing nothing on Wednesday. Brazil was 80%.
Kevin Warsh’s speech is the only thing that may move markets.
Look at the implied volatility for the week, the price traders pay for options, and the market is pricing a hair more of it for the Fed. It’s giving more to the big earnings and Thursday’s PCE inflation data.
People are starting to care about economic data out of nowhere, because you can see some deterioration in the economy all around you. So take it slow and take it as it comes. In-and-out trades, opened and closed the same day, are where I’d go after it harder.
A 90% chance still leaves one in 10, and Brazil showed you what one in five looks like.
I’m going live at 2 p.m. ET Wednesday when the decision hits. You’ll see where rate expectations go from there, and why the options market is paying more for Thursday and Friday than for the Fed itself.
I’ll also show you the sector that’s spent back-to-back weeks outside its expected move. It’s one more push away from an opportunity, and I don’t think it’s time to fade it yet.
And if you own gold, be there. There’s one level I think means a lot right now, and gold either bounces off it or there’s a substantial drop.
→ Join Me Live When The Fed Decides
To your success,
Don Kaufman
P.S. Watch the bonds on Wednesday, too. We’re still talking about inflation, but the market doesn’t believe it, and bonds are matching last week’s highs. Save your seat for 2 p.m. ET.
