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Rates at the floor, capital in the cellar — October 2019

Episode

The extreme

Rarely was the invitation so cheap and so declined at the same time. The price of money fell to the lowest level in the series, the investor's mood returned to the center after August's scare, and yet conviction capital did the opposite of buying: it shrank to the deepest point of the half-year. Everything in the window invited; the customers hesitated at the door. In numbers: the Selic cut to 5.0% a year, the month's IPCA nearly flat at 0.10%, the Ânima Index back to neutral (from 42.0 to 54.9) — and the Perene Risk Index easing from 20.6 to 11.0, the lowest since the reading began in the half-year. The dollar closed at R$ 4.087.

What happened next

The mismatch resolved itself, and on the optimistic side — the opposite of what the flow's pessimism seemed to announce. Over the next two months capital not only returned but caught up with the mood: December closed 2019 with the house's three axes pointing up together, a rarity in the series — Ânima at 78.7, the Perene risk at 78.8, the intermarket shot up to 95.57. Those who seemed to doubt, bought. The cheerful convergence, however, did not last past the first week of January 2020: all three pulled back at once, mood at 33.2, flow at 42.6, the intermarket at 38.2. And in April 2020 came the pandemic's bottom — Ânima nailed to extreme pessimism at 16.0, the dollar at R$ 5.3256.

What didn't happen

The flow at 11.0 was not the start of a flight. Anyone who read the floor of conviction capital as "the money sees a risk the mood ignores" got the short term wrong: two months later that same index marked 78.8. Rates at the floor likewise did not guarantee lasting appetite — the euphoria it helped inflate in December lasted weeks. And the mismatch did not die: it reopened a year later, inverted, with the intermarket in risk_on (67.0) and the mood stuck at the bottom (28.6) in October 2020.

Honest verdict

The engine saw the mismatch, not the cause. Getting right that mood and capital diverged did not say which of the two was right — and the tempting reading was disproved first by December's optimism, then rewritten by a reason no October indicator contained. Divergence is a question, not an answer.

Continue reading: The convergence on the optimistic side · The rally on the eve of the storm · The mood returned, but the money left →

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Characters: Rates (Selic)