A REAL MESS
BRAZIL’S CURRENCY AND STOCK MARKETS PLUNGE AS POLITICAL TURMOIL GRIPS NATION
RIO DE JANEIRO• Brazil’ s currency, stocks and bonds tumbled as a fresh political crisis ensnared President Michel Temer and threatened to derail an agenda designed to pull Latin America’s largest economy out of its deepest recession on record.
Trading on the Ibovespa briefly came to a halt, with state-owned companies from Petroleo Brasileiro SA to Banco do Brasil SA among the worst losses. The real posted its biggest slide since 2008 even after the central bank intervened to support the currency. The premium investors demand to own the nation’s sovereign bonds rather than U.S. Treasuries jumped the most since June 2013.
“Markets will overreact, but the reality is that Brazil is rooting out the corruption that has plagued it for centuries,” said James Gulbrandsen, a Rio de Janeiro- based portfolio manager at NCH Capital who holds Brazilian shares. “This significantly increases the likelihood of new elections within the coming months.”
Brazil’s political crisis deepened on Thursday as government allies began openly discussing scenarios for the replacement of Temer after federal police carried out search and arrest warrants throughout the capital, Brasilia. The operation came after O Globo newspaper reported on leaked testimony indicating that Temer approved payoffs to buy the silence of Eduardo Cunha, the mastermind behind last year’s ouster of former president Dilma Rousseff. The allegations are the latest twist in a sprawling corruption scandal that has reached the top levels of the country’s financial and political elite.
The presidential press office vehemently denied the allegations.
The political crisis pushed the CBOE Brazil ETF Volatility Index up as much as 63 per cent, heading for a record daily jump. The iShares MSCI Brazil Capped exchangetraded fund plunged 16 per cent. The selloff also drove up the yield on the country’s 1 billion euros of bonds due 2021 by the most since they began trading three years ago.
Brazil’s currency futures plunged in early trading, triggering a circuit breaker. This year’s carry-trade gains from going long the Brazilian real and short the dollar are nearing zero after reaching 8.7 per cent on Tuesday. A spike in one-month implied volatility also signals choppy trading ahead.
Brazilian assets had rallied in the past year as Temer pursued policies designed to pull the country out of recession and close a budget deficit.