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The escalation of U.S. prices, triggered by the unresolved geopolitical conflict in the Middle East, will force the U.S. central bank, the Federal Reserve (Fed), to raise interest rates in that country. The consequence of this action is to attract international investors to the largest (and safest) economy on the planet.
It’s not just the ‘second wave’ of tariff hikes – which imposes an average rate of over 37% on ‘made in Brazil’ products – that is most relevant to consider among the effects of the commercial attack, with undisclosed political motivations, by the Trump administration on the Brazilian economy.
Despite having recorded the largest outflow of foreign capital since 2022 (R$ 14.91 billion) last May, the inflow of foreign resources into the secondary market of B3 (B3SA3) still accumulates a positive balance of R$ 41.6 billion this year. Despite this ‘surplus’ profile, the trend continues to be the withdrawal of foreign resources from emerging markets, such as Brazil.
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Federal Reserve expected to raise interest rates in the U.S.
Given the rise in inflation in the U.S. – whose annual rate increased from 3.3% in March to 3.7% in April this year, the highest rise in three years – the Federal Reserve (Fed), the U.S. central bank, is expected to raise interest rates in that country again, currently between 3.5% and 3.75% per year, exerting additional attraction of foreign capital to the U.S. market, to the detriment of the Brazilian market.
This change in scenario has as its ‘background’ the oil shock, due to the billion-dollar geopolitical conflict in the Middle East, where investors seek greater protection and less risk (hedge) for their investments.
Besides directly impacting stock prices on Bovespa (B3), the outflow of foreign capital also pressures the exchange rate, appreciating the dollar against the real, and ‘puts pressure’ on the Central Bank (BC) to delay or reduce the intensity of monetary tightening, by lowering the basic interest rate (Selic) – currently at the ‘massive’ level of 14.50% per year. It’s bad news for both entrepreneurs and consumers alike.
Main impacts of U.S. monetary tightening
Capital flight to American fixed income: with higher interest rates on U.S. Treasury bonds (considered the safest assets in the world), global investors reduce their exposure to emerging markets like Brazil, resulting in a devaluation of stocks.
Pressure on exchange rates: the outflow of dollars from the country reduces the supply of foreign currency in the domestic market, making the dollar more expensive compared to the real. As currency depreciation ends up putting pressure on the country’s internal inflation, the Central Bank also tends to ‘hold’ the Selic rate at higher levels, ‘sine die’.
Increase in capital cost: With a stronger dollar and global inflation, Brazilian companies indebted in foreign currency or dependent on imported inputs face lower profit margins, which affects their stock market valuations.
Lock on internal interest rates: external pressure prevents the Brazilian Central Bank (BC) from reducing the Selic rate as desired, keeping the cost of credit high for the domestic market and favoring Brazilian fixed income over variable income.
In fiscal terms, although ideologically separated, the governments of the U.S. and Brazil can be considered ‘Siamese twins’, regarding the astronomical and growing amount of their respective federal public debts. In the first case, the Federal Public Debt (DPF) reached R$ 8.798 trillion last April, while in the second, it hit US$ 3.4 trillion (R$ 17.1 trillion). In both countries, for more than five years, the inflation target has been systematically ‘exceeded’, 2% in the U.S. and 3% in Brazil.
In common, interest payments and pension expenses
But there is one detail that makes all the difference: the U.S. economy, whose GDP is more than 15 times larger than Brazil’s, from US$ 32.38 trillion to US$ 2.64 trillion, respectively. Here, as there, interest payments and pension expenses are the main contributors to public debt.
In times of global stress, like the current one, the largest buyers of U.S. Treasury bonds, hedge funds, demand higher returns on investment, which favors the U.S. market to the detriment of so-called emerging markets, like Brazil. Due to this reorganization of capital flows, riskier assets, such as public and private bonds from emerging countries (currencies and stocks) become less attractive.
While the chief economist of Ouribank, Cristiane Quartaroli, assesses that Brazilian international reserves (US$ 366 billion) and the projected trade surplus (R$ 72.1 billion) help reduce the risk of a currency crisis, the CEO of asset manager Hike Capital, Jonas Carvalho, emphasizes that “Brazil remains an international net debtor, depends on foreign flow for stocks and fixed income, has domestic fiscal risk, and a public debt very sensitive to the Selic.”
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