BRASILIA, June 21 (Reuters) - Brazilian markets rallied on Friday as the increasing likelihood of interest rate cuts at home and abroad, together with rising oil prices and optimism over domestic economic reforms boosted investor sentiment and sent stocks to their highest on record.
Local markets reopened after a national holiday the previous day, giving investors their first opportunity to react to the Brazilian and U.S. central banks' rate decisions and statements on Wednesday.
While both kept official interest rates on hold, the overwhelming market consensus was that the signals pointed to policy being loosened in the coming months, perhaps dramatically.
Investors chose to focus on the path for borrowing costs rather than what is actually pressuring them lower, namely an alarming deterioration in the economic growth outlook, and bet on when the easing cycle will begin.
"It seems obvious to say, but a combination of a dovish Fed and a (Brazilian) central bank showing it is ready to cut rates ... is giving a boost to risk assets," said Cleber Alessie, a trader at brokerage H.Commcor in Sao Paulo.
This lifted the benchmark Bovespa stock market to a new high of 102,022.59 points, with energy and financials leading the charge, rising 3.0% and 2.7%, respectively. In afternoon trading, the Bovespa index was up 1.6% at 101,903 points, bringing the weekly gain up to 4%.
Oil futures rose 1% on Friday, bringing their gains on the week up to 10%, on fears the United States could attack Iran and disrupt flows from the Middle East. Preferred shares in Brazil's state-owned oil giant Petrobras were up 2.80%.
The Brazilian real rose to its strongest against the dollar in three months at 3.8137 per dollar, before giving back some of these gains, while interest rates futures tumbled across the curve.
Implied interest rates on all rate futures contracts from September out to the middle of 2022 are lower than where they are for the next few months. This reflects expectations that the central bank will cut rates later this year and not raise them back to the current 6.50% or higher for at least three years.
Trading in rate futures was busy too. In afternoon trade, 327,345 of the July 2020 contract had changed hands, a new daily record.
Markets are also betting that an adequately robust pension reform package in Brazil will be passed, and soon. This would help shore up the public finances, improve business and investor confidence, and give the central bank cover to lower interest rates.
Reporting by Jamie McGeever Editing by Alistair Bell and Susan Thomas