JPMorgan's Brazil downgrade triggers worst stock rout since March

JPMorgan downgraded Brazilian equities from "overweight" to neutral on Tuesday, and the market didn't wait to react: the Ibovespa tumbled 2.5%, its worst daily performance since March, closing at 167,874 points — the lowest level since January — while the dollar advanced 1.02%, ending at R$5.164. The U.S. bank's decision crystallized in a single stroke what markets had been pricing in for weeks: the Brazil entering the second half of 2026 is a country where disinflation is taking longer than expected, rate cuts will come more slowly, and electoral risk is beginning to weigh on assets with growing clarity.

JPMorgan's report is surgical in its diagnosis. The slower descent of the Selic rate — the central bank cut only 25 basis points last week, bringing the rate to 14% annually — and a more prolonged disinflationary process are expected to pressure the equity market throughout the remainder of the year. The Copom minutes, released the same Tuesday, reinforced this reading by stating that demand continues to pressure inflation and that rates need to remain at a sufficiently restrictive level to slow the economy. July's IPCA, which came in at 0.07% — the lowest for the month in four years and below the 4.5% ceiling on a 12-month basis, at 4.44% — could have been celebrated as good news. It wasn't. It came in above market projections, and the demand-sensitive services group accelerated from 0.22% to 0.42%, a sign that core inflation remains stubborn. Economists, for their part, have already revised GDP projections downward for the first time since April.

It is in this environment that voices from the private sector are beginning to break their silence. Armínio Fraga, former central bank president and partner at Gávea Investimentos, and Alfredo Setúbal, CEO of Itaúsa, the holding company that controls Itaú Unibanco, have publicly admitted the possibility of a recession in 2027. Setúbal described the scenario as one of a "considerably decelerated economy" with the risk of a "small recession"; Fraga sounded even more pessimistic. The fact that such statements emanate from two of the most respected names in the Brazilian business community — rather than from opposition economists — gives them particular weight. Market economists, as Folha de S.Paulo notes, have not yet incorporated recession as their base case, but the gap between what the financial sector sees on the ground and what official projections capture tends to narrow.

The exit of foreign investors from the stock exchange, already underway before JPMorgan's downgrade, gained additional velocity with the intensification of electoral risk. The market prices the re-election of Luiz Inácio Lula da Silva as a scenario of lower probability for fiscal adjustment, and this perception is reflected directly in risk premiums. Anbima, the association of financial and capital markets, is already moving to bring its agenda of capital markets development and Custo Brasil reduction to all presidential campaigns, signaling that the private sector does not intend to passively await the electoral outcome.

The fiscal picture takes on additional layers of opacity. The TCU has requested explanations from the Receita Federal regarding the methodology used to estimate revenue from the taxation of dividends, whose projection failed in the first six months of the year — a shortfall with direct impact on compliance with the fiscal framework's targets. In the Senate, the approval of incentives for domestic fertilizer production carried with it an embedded tax break that will now go to the Chamber for consideration, adding further pressure on an already fragile fiscal balance. The salary floor for physicians — which would jump from R$3,600 to R$13,600 for 20-hour workweeks — was temporarily phased in over three years by the Senate's Economic Affairs Committee, postponing but not eliminating an expense the government feared seeing approved immediately.

In the agricultural sector, the picture complicates along distinct routes. Fertilizer imports fell 7% through July in response to elevated prices, and total domestic consumption is expected to retreat from 49.1 million tons last year to 46.7 million this year. The asset manager 051 Capital is analyzing the restructuring of R$1.5 billion in soy producer debt, a signal that financial stress in agribusiness — already visible in the sector's rising judicial recovery filings — is deepening. The renegotiation of up to R$100 billion in rural debt, authorized by a provisional measure published nearly a month ago, remains practically paralyzed, with only one operation recorded, according to Valor Econômico.

At the port of Santos, Cade is moving toward approving the corporate restructuring proposed by Maersk and MSC at Brasil Terminal Portuário, which will allow the world's two largest shipping lines to participate in the Tecon Santos 10 auction. The structure is ingenious: if one wins the auction, the other fully takes over BTP. The Philippine operator ICTSI, which is also competing in the auction, is attempting to block the operation, arguing that the two rivals are effectively dividing the port's two main container assets between themselves — an argument that Cade's staff has apparently not accepted. The final decision may still be brought before Cade's tribunal by any commissioner over the next 15 days.

Amid the pressure on domestic assets, BNDES reached R$1.058 trillion in total assets in June, surpassing the R$1 trillion mark for the first time — a milestone that highlights the development bank's expansion in the recent cycle. In the opposite direction, the share of executives and investors who view the outlook for infrastructure as unfavorable jumped from 20.4% to 30.9% over the past six months, according to Abdib's semiannual survey. Private-sector growth in basic sanitation — now present in nearly half of Brazilian municipalities, versus a much smaller share before the 2019 Legal Framework — coexists with this growing pessimism about the broader regulatory and macroeconomic environment.

Norsk Hydro added a dimension of risk to the global aluminum chain by announcing that its Alunorte refinery in Pará — one of the world's largest — reduced production to 50% of capacity due to natural gas shortages, contributing to pushing aluminum prices to their highest level in seven weeks. The episode reignites questions about gas supply infrastructure in Brazil's North and the operational risks of large-scale industrial projects in the region.

In the coming sessions, the market will be watching the progression of the BRB case — where the FGC states it has not received sufficient documentation to enable the loan of up to R$6.6 billion to the Federal District bank — the pace of foreign investor outflows from the exchange, and the positioning of other large international banks on Brazilian assets following JPMorgan's move. The first preview of August's IGP-M accelerated to 0.26%, pulled by producer prices, suggesting that wholesale inflation relief may be losing steam. With the electoral calendar approaching and the central bank signaling prolonged caution, the Brazilian risk premium will hardly find reasons to retreat in the short term.

**JBS (NYSE: JBS)** — JBS announced that Indonesia's sovereign wealth fund Danantara will invest US$2.5 billion in a joint venture composed of the company's assets in Australia and New Zealand, valued at US$7.5 billion — half the company's total market value on the New York Stock Exchange, where shares rose 4.5% in the session. The transaction will give Danantara a 25% stake in the JV and opens up a Southeast Asian expansion platform for the Brazilian group; simultaneously, the company announced that Wesley Batista Filho, 34, will assume global leadership starting in January 2027, consolidating the return of family control to executive leadership.

**Natura &Co (NYSE: NTCO)** — The cosmetics group reported net income of only R$35 million in the second quarter, an 82% year-over-year decline, and CEO João Paulo Ferreira publicly admitted the need for a "course correction." The sharp deterioration in the results of a company with ADRs traded in New York and a relevant presence in Latin America, Europe, and the U.S. through Avon raises pressure on management to accelerate portfolio restructuring and reverse the loss of profitability.

**Norsk Hydro / Alunorte (OSE: NHY)** — Norway's Norsk Hydro reported that its Alunorte alumina refinery in Pará will operate at 50% capacity due to restrictions in natural gas supply, an impact already reflected in global aluminum prices, which reached their highest level in seven weeks. Alunorte is one of the world's largest alumina refineries, and any prolonged interruption in its production has direct repercussions on the global primary aluminum supply chain.