Brazil's stock market halts four-month rally as foreign investors flee

The picture emerging from Wednesday's newsflow is that of a Brazil which, in terms of markets and economic outlook, has moved from peak to a considerably more sober footing in just four months — and the speed of that reversal is what makes today analytically distinctive.

The Ibovespa closed the session down 0.23%, at 167,491 points, marking seven consecutive declines and still without a single positive day in August. The index, which had touched a historic peak of 198,000 points in April, when Brazil was being celebrated as the emerging-markets favorite at the IMF Spring Meetings, is now trading below its 9-, 21- and 200-period moving averages — an unequivocally bearish technical configuration. The dollar closed at R$5.177, up 0.26% on the day, at its highest level since early June. In the first three and a half months of the year, foreign investors had injected nearly R$70 billion into the Brazilian stock exchange. Since then, they have pulled out more than half of that amount, with net outflows of R$7 billion in August alone, according to data compiled by Folha de S.Paulo. The shift in mood is sharp and driven by at least three simultaneous vectors: the war in Iran, which has disseminated inflation globally and complicated the outlook for monetary easing in developed economies; domestic electoral volatility, with the 2026 presidential race beginning to contaminate asset prices; and JPMorgan's formal downgrade of Brazilian equities from "overweight" to "neutral," citing a slower path of rate cuts and a more protracted disinflation process.

That last point speaks directly to the most recent data: inflation decelerated to 0.07% in July but came in above economists' expectations, according to the IPCA released by IBGE. Ten-year real rates remain around 7.8% above IPCA — a level not seen since the 2009 financial crisis. The "higher for longer" narrative is consolidating as the structural constraint that subordinates all others. Not coincidentally, an Itaú BBA survey of 99 local and foreign investors shows that cash generation and earnings outlook have become central to equity allocation decisions — which, in market parlance, is another way of saying that speculative appetite has evaporated. The global race for artificial intelligence aggravates the relative problem: South Korea and Taiwan attracted, respectively, US$70.6 billion and US$56.5 billion of international equity fund flows in the first seven months of the year, while Brazil pulled in US$11.9 billion — a figure that, in any other context, would look robust, but which in the shadow of the Asian peers only underscores how far Brazil sits outside the dominant global market narrative.

The confluence of high rates, electoral risk and slowing activity is beginning to shift the economic debate from technical circles to the public sphere. Arminio Fraga and Alfredo Setúbal, CEO of Itaúsa, spoke openly of a possible recession in 2027 — a scenario that bank forecasting models have yet to incorporate, but which voices of that caliber rarely float without substance. The services sector was flat in June, defying expectations of a decline, but corroborating, according to analysts, a broader weakening trend in the economy. Judicial recovery filings in agribusiness rose 21.9% in the first quarter of this year, to 474 cases, according to Serasa Experian, reflecting tighter bank credit to the rural sector and debts accumulated during the previous expansion cycle.

The corporate environment mirrors that stress. Braskem, controlled by IG4 Capital and Petrobras, whose common shares and ADRs trade on the B3 and NYSE respectively, is in advanced discussions over an out-of-court restructuring filing that could be submitted as soon as this month, aimed at addressing more than US$10 billion in debt spread across Brazil, the United States and Europe, according to sources heard by Reuters. The company is racing against a specific deadline: on August 24, a precautionary protection obtained in June expires. Creditors have already rejected an offer that provided for a five-year grace period on principal and two and a half years on interest. The Braskem case is emblematic of the current dynamic: a company operating in a globally depressed petrochemical sector, still carrying the environmental liability of the salt mines in Alagoas, attempting a complex restructuring under time pressure in a hostile domestic credit environment.

On the fiscal front, Congress on Wednesday approved the complementary bill on fuels, which authorizes spending outside the fiscal framework's limits in 2026 — an election year — but embeds two triggers to contain mandatory expenditures from 2027 onward. Finance Minister Dario Durigan estimates that the measures should hold back the growth of mandatory spending by R$10 billion next year. The political logic is transparent: the government accommodates present-day demands, including a subsidy of up to R$1.2 billion for ethanol, while signaling future discipline to a skeptical market. That skepticism, incidentally, is already priced in: Valor Econômico reports that equities and the exchange rate have begun to move "to the rhythm of the elections," with the index below 170,000 points after foreign investors signaled that they want distance from the volatility of electoral periods, regardless of which of the two front-runners — Lula or Flávio Bolsonaro — ends up leading the polls.

The government also signed decrees regulating the opening of the free electricity market to all consumers as of November 2028, a structurally relevant measure but one immediately met with reservations from the Federal Public Prosecutor's Office, which is monitoring the timeline amid concerns about a proliferation of litigation in the sector. Tax reform, in turn, is accumulating its own operational complications: the automated collection system known as split payment will not be ready for January 2027, when CBS and IBS collection formally begins, according to Folha de S.Paulo — a delay that entails transition costs for companies and for Receita Federal.

On the geopolitical front, Peter Navarro, a White House advisor, accused Brazilian companies of taking part in what he described as a cartel in beef processing in the United States, adding fresh pressure to a bilateral relationship already strained by the diplomatic standoff over the Brazilian ambassador in Washington, whose visa was canceled by the State Department. Valor Econômico reports that Washington is signaling additional measures if Brasília does not move forward with approving the name of the new US ambassador, Daniel Perez.

What to watch in the coming sessions: Thursday's US Producer Price Index (PPI), which will provide the next calibration on the Federal Reserve's trajectory; domestic retail sales data, which will close out the batch of June activity indicators; Braskem's August 24 deadline, which will serve as a thermometer of creditors' willingness to negotiate outside the judicial route; and, more structurally, whether the foreign outflow from B3 consolidates or finds a point of stabilization as the market prices in electoral risk with greater clarity.

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**Braskem (NYSE: BAK; B3: BRKM5)** — The petrochemical company is weighing an out-of-court restructuring filing as soon as August to address more than US$10 billion in debt across Brazil, the United States and Europe, with a critical deadline on August 24, when its current precautionary protection expires. Creditors rejected a proposal offering a five-year grace period on principal, making the outcome highly uncertain.

**Banco do Brasil (NYSE: BDORY; B3: BBAS3)** — Adjusted net income reached R$3.9 billion in the second quarter, up 3.3% year-on-year and 13.9% versus the first quarter, signaling a recovery after the wave of defaults in agribusiness, with treasury and consumer lending offsetting the delinquency in the rural segment.

**MRV&Co (B3: MRVE3)** — The holding company posted a net loss of R$626.6 million in the second quarter, a 22.8% improvement over the same period of 2025, but weighed down heavily by a US$110 million writedown at Resia, its US subsidiary being divested amid an adverse real estate market in the United States.