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The baton that returned to commodities — September 2017

Episode

The extreme

For a month, it looked as if the Brazilian market would change bosses. The money that all year long had rewarded the commodities cycle began to look for a new address — the domestic financial sector — and that migration was the month's most decisive move. The index's payroll was switching departments; the salary it paid out stayed about the same. In numbers: the Commodities/IBOV ratio retreated from +1.01 to −0.21, the month's largest drop and more than a full deviation, while Financials/IBOV took the opposite road, from −0.74 to +0.25 — the strongest favorable turn in the composition. Domestic mood boiled along with it, with the Ânima Index from 58.2 to 66.1 (extreme optimism), the Selic at 8.25% a year and the dollar at R$3.1348.

What happened next

The baton did not stay in the financials' hands. Three months later, in December 2017, the change of command reversed entirely: Financials/IBOV collapsed to −1.78, the floor of the composition, while commodities pulled away from the index again and printed +2.22, two deviations above the mean. What September read as the start of a rotation became, by year's end, the opposite. In March 2018, financials barely breathed (z of 0.48), and commodities — though easing from 1.63 to 0.85 — still ran the show. And when leadership finally changed hands for real, in September 2018, the ones who took it were the cyclicals (Cyclical/Non-Cyclical jumping to 1.15), not the banks, which stayed in negative relative territory.

What did not happen

The rotation into financials did not become a trend. That near-full deviation the domestic sector gained in September was not the first step of a journey; it was an isolated peak, given back before Christmas. The extreme optimism did not last either: Ânima, pinned at 66.1, cooled to 57.1 in December, confidence's first pullback since that same September. And commodities, written off as leadership in retreat, did not retreat — they came back hard.

The honest verdict

The reading got the tension right and the outcome wrong. September caught that sector leadership was changing hands — and it was. But the baton that seemed to migrate to financials returned to commodities within a quarter, and would only truly change owner a year later, to yet another sector. The biggest turn of any one month is not always the start of something: sometimes it is the highest point before the giveback.

Continue reading: The capital moves neighborhoods · The financials leave the table · The confidence the capital distrusts →

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Characters: Structure (intermarket) · Flow (risk appetite) · Mood · Dollar · Commodities