The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and other Brazilian ETFs have been enjoying a mostly excellent 2014, but that ebullience has encountered some resistance in recent days. Investors’ willingness to stick by EWZ and Brazilian stocks in the run-up to next month’s national elections is being tested Tuesday after Moody’s Investors Service lowered its outlook on Brazil’s sovereign debt rating to negative from stable.

That news has EWZ, the largest Brazil ETF, down about 1% in midday trading, extending the ETF’s one-week plunge to 6.3%. That represents a swift change in sentiment for EWZ, which closed at $53.90 on Sept. 2, its highest close since May 2013.

The Moody’s news is not the only glum headline to impact Brazilian equities in recent days. Brazil, Latin America’s largest economy, officially fell into a recession in the first half of 2014. That should play into the hands of Brazilian Socialist Party candidate Marina Silva, but some recent polls show support firming for embattled incumbent President Dilma Rousseff. [Maybe a Big Day for Brazil ETFs]

Moody’s rating action “reflects the rising risk that sustained low growth and worsening debt metrics indicate a reduction in Brazil’s creditworthiness, which would trigger a downward migration in its credit rating,” said the ratings agency.

Moody’s expects Brazilian GDP to grow less than 1% this year, the country’s worst rate since 2009, and by just 2% in 2015.

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BrokerDealer.com blog post courtesy of extract from ETFTrends.com and Tom Lydon

Give the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) some credit.

The largest exchange traded fund tracking Brazilian equities rose nearly 1.4% Monday, although volume was light, despite news that President Dilma Rousseff improved her showing in a recent poll.

Teneo Intelligence notes that “Rousseff’s approval rating has actually increased from 34 to 38% – a level that tends to auger very well for incumbents a couple of months before elections,” reports Dimitra DeFotis for Barron’s.

Financial markets have overtly displayed a preference for any candidate not named Rousseff ahead of Brazil’s October elections, typically pushing EWZ noticeably higher on days when polls are released showing waning support for the incumbent. That trend was bucked Monday when EWZ gained despite news of increased support for Rousseff. 

[What's Bad for Rousseff is Good for Brazil ETFs]

EWZ and other Brazil ETFS gained Monday because there is more than meets the eye to the aforementioned poll showing increased support for Rousseff. Marina Silva, the candidate replacing Eduardo Campos who dies in a plane crash last week, has drawn nearly even Senator Aecio Neves. Campos was polling at around 8% prior to his death and news of his passing prompted a noticeable intraday sell-off in EWZ last Wednesday. [Brazil ETF Tumbles on News of Campos Crash]

Importantly, Silva could push Rousseff to a run-off and she “would command 47 percent of the vote in the second round, compared with 43 percent for Rousseff, a difference that falls just within the plus or minus 2 percentage point margin of error in a Datafolha poll published Monday, report Anna Edgerton and Raymond Colitt forBloomberg.

A run-off can be averted only if one of the candidates garners more first round votes than the other two candidates combined.

EWZ is up 18.4% year-to-date, making it the second-best performer of the four major single-country BRIC ETFs behind the WisdomTree India Earnings Fund (NYSEArca: EPI).

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