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The extreme that changed address — the commodities of 2011

Episode

There are extremes that burst, and there are extremes that merely change address. The start of 2011 was of the second kind, though no one could have known it while it was happening.

The extreme

Commodities priced in reais opened the year at the top of the Brazilian market's hierarchy, carrying a premium that bordered on the uncomfortable — the kind of reading that rarely holds. When March arrived, that premium began to drain away, and the capital it released did not vanish: it went into the energy that keeps the lights on. In numbers: the Commodities (R$)/IBOV ratio retreated from 3.27 to 1.56 deviations — the largest move of the month — while Utilities/IBOV rose from 1.39 to 2.89. The Perene Risk Index, in the same step, recomposed itself violently, from 14.5 to 74.4, and the intermarket gave way to 31.56. The surface spoke of confidence; the plumbing through which the money ran, of caution.

What happened next

The extreme did not burst. It dissolved slowly, over the course of a year. In June, three months later, the financial sector left the infirmary — Financials/IBOV from −0.67 to −0.04 — and commodities kept giving way, with the domestic regime still firm at 65.7. In September, six months later, the premium on raw materials collapsed for good, with Commodities (R$)/IBOV falling from 2.67 to 1.12, and the Perene Risk returned to neutral terrain, at 50.7, even as the dollar jumped to R$ 1.75. In March 2012, twelve months later, the capital that had left commodities had piled up in the utilities: Utilities/IBOV hit 3.21 deviations — an extreme even greater than the one that had opened the year. The premium had simply changed address.

What did not happen

The domestic regime did not break. Throughout the period, the Brazilian reading remained in assumed risk — 72.6, then 65.7, then 62.7 — while the structure underneath dug in for defense. The divergence between the two axes did not resolve in a panic nor in a reconciliation: it widened across four quarters. And the Selic cut, when it came in 2012, to 9.75% per year, brought no relief to the structure — the market read it as a squeeze on banking margins, and Financials melted further.

The honest verdict

The engine got the nature of the move right — capital leaving the cyclical for the defensive — and not its speed. An extreme at the top of a series is not a clock: it does not say when it reverts, nor whether it reverts. In 2011, it did not revert. It migrated, deviation by deviation, to the other side of the screen, and took a full year to get there.

Continue reading: The sector that leaves the infirmary (June 2011) · The premium on raw materials dissolves (September 2011) · The trench dug in broad daylight (March 2012) →

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