We turned bullish on Brazil back in February.  Our leading indicators had been turning up, the effects of previous Selic hikes had begun to recede, and we expected inflation would fall, opening up the path for interest-rate cuts.  Year-to-date, Brazil has delivered the second-highest returns of all major equity markets (click images to enlarge).

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When sentiment is so universally derisive of an investment idea, the probability of an outsized reaction on less bad news – let alone any good news – is high.  However, nothing goes up in a straight line, and we expect to see a short-term pullback in Brazilian bonds and equities.  The market is now overbought on some shorter-term measures, and sentiment is less one-sided.  According to the CoT report, speculators in the BRL began to get long at the beginning of this year, but they have dramatically reversed that long position to now being net short again (next chart).  This suggests the fast money has taken profits.

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Without any new impetus, the market will likely need to consolidate, to work out the over-boughtness, or head lower to attract more speculative money.  The political progress made with the impeachment of President Rousseff was already priced in, and the bar for a resumption in the upwards trend in asset prices is now higher than it was before.