Options traders are placing more bearish bets against a U.S. exchange-traded fund tracking Brazil than any time in three years, as policy makers raise borrowing costs to tame inflation in Latin America’s biggest economy.
The ratio of put options to sell the iShares MSCI Brazil Index Fund versus calls to buy has jumped 60 percent in the past two months to 1.76 and on Feb. 3 reached 1.81, the highest level since January 2008. The last time it reached this level, the fund tracking 83 securities plunged 62 percent over the next 10 months. The fastest-growing bets are February $69 puts. The fund hasn’t closed below $69 since Aug. 31 and fell 1 percent to $71.32 yesterday.
Brazil’s Bovespa stock index is down 5.7 percent this year, compared with a 4.9 percent gain for the MSCI World Index. Policy makers said Jan. 19 that they are beginning a “process of adjustment” in rates along with measures to slow inflation as the economy grows by the most in more than two decades. Brazil’s benchmark interest rate was raised half a percentage point to 11.25 percent last month.
“Brazil is a worrisome market,” said Constance Hunter, managing director and chief economist at Aladdin Capital Management LLP in Stamford, Connecticut, which manages $13 billion. “The combination of high real interest rates and high inflation is going to put the brakes on the economy, and that will impact corporate earnings and the equity market.”
Open Interest
Open interest for put options has risen 26 percent since Jan. 24 to 760,771, while the number of calls has increased 21 percent to 432,623. The most widely owned contracts on the ETF are the January $65 puts. They have an open interest of 45,354 contracts, or 6 percent of all outstanding puts to sell the ETF. The fund’s last close below $65 was July 16.
February $69 puts, the fastest-growing wagers, have jumped by 16,715 since Jan. 24 to 19,514 contracts, which if exercised would give the right to sell 1.95 million shares. The next biggest gains were in the February $68 puts and February $67 puts, both of which increased by more than 14,000 contracts.
“There are some pretty large positions in the downside puts,” said Ophir Gottlieb, head of client services at Livevol Inc., a San Francisco-based provider of options market analytics. “The options market is reflecting more downside risk.”
Emerging-Market Outflows
Emerging-market ETFs are having their biggest-ever weekly outflows as clashes in Egypt and record world food prices heightened concern that inflation may spur social unrest and curb consumer spending. Investors pulled $4.6 billion from ETFs that track developing-nation stocks during the week ended Feb. 2, according to Bank of America Corp., which cited data compiled by research firm EPFR Global. Outflows from all emerging-market equity funds totaled $7.2 billion, the most since January 2008.
Citigroup Inc.’s Economic Surprise Index for emerging markets, a gauge of how much reports are exceeding the median economist estimates in Bloomberg News surveys, has dropped to 20 from almost 65 a year ago.
“Inflationary pressures are causing people to get a little jittery,” said Dave Lutz, head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore. “A lot of people are getting behind U.S. equities and we’ve seen a big rotation out of emerging markets.”
Paring Bets
Withdrawals from ETFs signal hedge funds are paring bets on the fastest-growing nations, Morgan Stanley wrote in a Feb. 1 report. The MSCI Emerging Markets Index has dropped 2 percent this year as countries from Hungary to Indonesia raise interest rates to combat inflation.
Valuations for companies in Brazil’s benchmark index are down by almost half from last year’s peak. The Bovespa Index trades at 13.1 times earnings from the past year, compared with 16 for the MSCI World Index, according to data compiled by Bloomberg. That’s the lowest level for the Bovespa since May in relation to the global gauge.
The Brazil ETF, which is also known by its EWZ ticker symbol, has a record 172 million outstanding shares, up 14 percent from a year ago. The fund’s options ranked 20th for volume in the U.S. last year among about 3,700 stocks and indexes with listed contracts, according to the Options Clearing Corp. ETFs are listed on an exchange and change hands throughout the day like stocks.
“The main pressure on the market has been that the central bank is trying to cool the economy off,” said Greg Lesko, who helps oversee $800 million at New York-based Deltec Asset Management. “If they do slow down the economy, there will be certain companies that will have slower earnings growth that they might otherwise have had, which makes them less attractive.”
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.
Options Bets Against Brazil ETF Jump to Highest in Three Years
By - Feb 8, 2011 12:00 AM ET
About Me
- Waldemar Jezler
- For over 30 years, Brazilian-American investment banker Waldemar Jezler has worked in the finance sector. Jezler earned his Bachelor's degree in Civil Engineering from the University of São Paulo in Brazil and then went on to attend Harvard Business School for his MBA. While at Harvard, Jezler was highly involved in extracurricular activities, including a term as President of the Ibero American Club.