Brazilian stocks and the Brazilian currency rose significantly Friday, reversing the massive Thursday plunge in both that attended a political scandal involving the country’s president.
After a drop that wiped out nearly all of the Brazilian Bovespa index’s substantial year-to-date gains, investors are now positioning themselves for potential upside for the group, according to strategists. But risk for the country’s market is still apparent.
“It is hard to overstate how painful this move must be for EM investors and trend followers,” Pravit Chintawongvanich, head of derivatives strategy at Macro Risk Advisors, wrote Friday in a note to clients.
The MSCI Brazil ETF (EWZ), one popular U.S.-listed exchange-traded fund that tracks Brazilian stocks, fell more than 16 percent on Thursday after corruption allegations emerged against Brazilian President Michel Temer, which he has denied. This has led to calls for his impeachment — which would be the second endured by Brazil in about a year.
Interestingly, Chintawongvanich observed that after the plunge, traders do not to appear to expect large moves to the upside or downside. That suggests that options might be underpriced, and leads the strategist to recommend buying bullish call options on the EWZ.
As an intriguing sidenote, Chintawongvanich observed an incremental buildup in put buying leading up to Thursday’s sell-off. While the markets were clearly taken by surprise on Thursday, “some investors…