Technical Analysis - Trading: 2014-10-14

Brazilian Partition

Good afternoon, dear investors. Today we consider the spread instrument which discloses the internal structure of the Brazilian economy: №1 state by GDP absolute value in Latin America. One third of the Brazilian GDP accounts for the industrial sector, which is traditionally dependent on energy prices. Energy market in Brazil is almost fully controlled by the Petryleo Brasileiro (Petrobras) corporation: the main shareholder is the Government of Brazil which owns more than 32% of capitalization. The company is currently the dominant player in the oil and gas sector, as it controls more than 95% of crude production and 90% of natural gas reserves in Brazil. Moreover, Petrobras owns completely the oil and gas transmission network in Brazil and 11 oil refineries. Unfortunately, there is no more good news for PBR. Since 2010 together with the Brazilian economy recovery, energy shortages continue to increase. At the moment the country’s oil shortage is more than 670 thousand barrels per year, while imports continue to increase. However, exports decreased: there was a significant drop of 13% in 2012.

Additional restrictions are defined by social aspect of the state policy. Since 2011 the government has still kept domestic energy prices lower than global prices, as you can see on the figure below. The gap of “social support” is marked in red. Therefore, the net revenues of the company continue to fall as imports and oil price decrease. Thus, PBR reduced the net profit by 12% in the Q3 2014, compared to the same period last year, to 5.57 billion Brazilian reals ($2.7 billion). In terms of macroeconomic indicators, it does not have any serious consequences. Note that the Brazilian economy recovery is influenced by rising prices on agricultural products, which make up more than 20% of Brazilian exports.

Let us consider the basic segment of the agricultural sector (19% of exports) which has an equivalent on the commodity exchanges: soybeans, sugar, coffee and frozen beef. Note that the equally weighted portfolio based on the corresponding commodity futures has risen 8% since the beginning of September. It can be explained by seasonal factors and the world economy recovery. A favorable business environment will permit the Brazilian GDP to grow 1.8% this year (according to the Cabinet of Brazil). At the same time the resource requirements increase, and that will inevitably lead to a further Petrobras reduced capitalization. The opposite reaction of two Russian economic sectors on the global processes can be used to build a position portfolio.

To make visible the regularities described above, we have compiled portfolio spread instrument in NetTradeX platform: [SOYB + SUGAR + COFFEE + CORN + F-CATTLE]/[PBR + BRENT + NATGAS]. The composite instrument is based on quoting the portfolio of continuous agricultural futures (soybeans, sugar, coffee, corn and frozen beef) against the energy sector portfolio: Petrobras stocks, futures on Brent and natural gas. Note that the price of each of the assets included in the paired instrument is calculated automatically in US dollars by the program. The purchasing of the portfolio spread is equal to buying the basic portfolio SOYB(20%) + SUGAR(20%) + COFFEE(20%) + CORN(20%) + F-CATTLE(20%) and simultaneously selling the “energy portfolio” based on the currency cross-rate model. Assets of the quoted portfolio have the same weight of the capital invested: PBR(33%) + BRENT(33%) + NATGAS(33%).

The daily chart of the portfolio spread was built in NetTradeX. Only the opening and closing prices of the daily candlestick are used for calculation acceleration. We can see the price broke the bearish trend line and hit a new high in the green zone. ParabolicSAR confirms the uptrend, as well as the oscillator does. The trend is likely to continue when there will be the resistance breach at 1.02440, which was built on the basis of the Bill Williams fractal. Stop Loss is recommended to be placed at the support level of 0.96414, which is strengthened by the fractal and Parabolic historical value.

More information about the mechanism of portfolio operations is available on our website section “Quick Guide for Creating and Trading PCI”.