Junk-Status Downgrade Brings Brazil Stocks in Focus

iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ), Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR), and Vale SA (ADR) (NYSE:VALE) are in focus after Brazil's credit rating was downgraded

by Karee Venema

Published on Sep 10, 2015 at 11:58 AM

Late Wednesday, Standard & Poor's lowered Brazil's sovereign credit rating to junk status. The move has had a negative effect on the country's currency -- the real -- as well as U.S.-listed shares of Brazil stocks. Earlier, in fact, the iShares MSCI Brazil Index (ETF) (NYSEARCA:EWZ) hit $22.64 -- its lowest mark since June 2005 -- and was last seen down 2.4% at $22.93.

Also feeling the heat from this downgrade is oil-and-gas issue Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR). The shares have tumbled 3.9% to $4.89, and are within a chip-shot of taking out the 12-year low of $4.68 they tagged on Aug. 24. Longer term, the stock has shed 72% year-over-year.

It appears options traders have been rolling the dice on additional losses. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), PBR's 50-day put/call volume ratio of 0.91 ranks in the 90th annual percentile. Simply stated, puts have been bought to open over calls at a near-annual-high clip.

Mining magnate Vale SA (ADR) (NYSE:VALE), meanwhile, dropped 1% out of the gate, but has since revered course. At last check, the stock was up 3% at $5.14 -- building on its recent copper-related gains. Nevertheless, the shares remain 37% lower on the year.

​Put players have been active in VALE's options pits, as well, per the equity's 50-day ISE/CBOE/PHLX put/call volume ratio of 1.37 -- in the 77th annual percentile. Echoing this is the stock's front-month gamma-weighted Schaeffer's put/call open interest ratio (SOIR) of 2.59. Simply stated, near-the-money puts more than double calls in the September series of options.

Beverage maker Ambev SA (ADR) (NYSE:ABEV) is down 1.9% today to linger near $4.93. This struggle just echoes the longer-term troubles, with shares of ABEV off 29% year-over-year, thanks to several rejections from their 200-day moving average. More recently, the equity has been led lower by its descending 20-day trendline.

In spite of this, sentiment is tilted toward the optimistic side. For starters, the equity's SOIR of 0.14 rests lower than 86% of all similar readings taken in the past year -- signaling a call-skewed backdrop in ABEV's short-term options pits. Elsewhere, the majority of analysts covering the shares maintain a "buy" or better rating, with not a single "sell" to be found. A capitulation by call players and/or upbeat analysts could translate into additional headwinds for ABEV.

Banco Santander Brasil SA (ADR) (NYSE:BSBR) fell 3.2% at the open to $3.61 -- matching the record low it set on Aug. 24. More recently, the security was off 0.3% at $3.72, widening its year-to-date deficit to 26%.

Skepticism has been ramping up on the long-term laggard. Short interest, for example, jumped 12.4% in the latest reporting period. However, these bearish bets still only account for 4.7% of BSBR's available float, leaving the door wide open for shorts to increase their exposure. Elsewhere, all three analysts covering the shares maintain a "hold" or worse recommendation.

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