Brazil markets tumble on claims Temer endorsed bribe payments
3 President denies being caught on tape 3 Currency and stocks dive 3 Reform drive in peril
Allegations that Brazil’s president has been caught on tape endorsing bribe payments shook the country’s financial markets yesterday, sending shares and the real, Brazil’s currency, sharply lower amid investor fears that his government might collapse.
The charges against Michel Temer, published in the leading newspaper O Globo, forced market regulators to trigger a circuit breaker after the Ibovespa benchmark dropped 10.47 per cent in morning trading.
The real fell 7 per cent against the dollar on fears that the claims would torpedo the government’s reform plan to overhaul Brazil’s sinking public finances. Mr Temer has vehemently denied the claims. The scandal threatens to lead Brazil into uncharted waters.
Mr Temer and his centre-right coalition came to power only in August after the impeachment of his leftist predecessor, Dilma Rousseff, for budgetary violations. If the charges were to lead to Mr Temer’s impeachment, it would be the first time since the start of Brazil’s modern democratic period more than 30 years ago that two presidents have been removed in quick succession.
“We are now in the middle of the hurricane. There is a lot of uncertainty,” said Zeina Latif, chief economist at the São Paulo-based XP Investments.
O Globo reported that brothers Joesley and Wesley Batista, respectively chairman and chief executive of JBS, Brazil’s largest meatpacker, had pre- sented authorities with a secret recording of Mr Temer approving bribes to Eduardo Cunha, the disgraced former Speaker of the lower house. They did so as part of plea-bargain negotiations.
Brazil’s political and corporate establishment is already reeling from sprawling political corruption investigations into state oil company Petrobras in a scandal known as Operação Lava Jato, or Operation Car Wash. The investigations have also implicated Mr Temer and eight of his ministers, as well as a large part of the Congress.
Analysts said that unless Mr Temer can quickly prove the allegations false, his reform programme would probably be sunk, leaving Brazil’s economy at grave risk from an unsustainable fiscal deficit. Latin America’s largest economy is only starting to emerge from its worst recession in history, when gross domestic product contracted more than 7 per cent over two years.
According to the O Globo report, Mr Temer heard from Joesley Batista that JBS was paying Cunha, who is serving 15 years in jail, to keep silent. The president is alleged to have responded: “You’ve got to keep this up, OK?”
The report did not specify what it was that Cunha, who was crucial to Ms Rousseff’s impeachment, was alleged to have been asked to keep silent about.
The president’s office said Mr Temer “never asked for payments to obtain the silence of the former deputy Eduardo Cunha”. JBS declined to comment. Cunha could not be reached.
US stocks steadied after the previous day’s savage sell-off, although the global markets mood remained very nervous given this week’s intensification of political concerns in Washington.
There was only a partial reversal of Wednesday’s strong gains for so-called “haven” assets, such as US Treasuries, the yen and gold.
Heightening the cautious tone was a report published in a leading Brazilian newspaper alleging president Michel Temer had endorsed bribe payments, which sent Brazilian stocks and the real tumbling.
The recent controversies surrounding President Donald Trump — and talk of his possible impeachment — remained the focal point after a sharp deterioration in risk appetite on Wednesday fuelled the steepest oneday drop for the S&P 500 equity index in eight months and drove the CBOE Vix volatility index up a hefty 46 per cent to end above 15.
“The news out of Washington is alerting markets to the rising implementation risk associated with the pro-growth policies that have already been priced into markets,” said Mohamed El-Erian, chief economic adviser to Allianz.
By midday in New York yesterday, the S&P had managed to recoup five of the previous day’s 43-point slide to trade at 2,365, while the Vix — watched as a gauge of stock market stress — had retreated 4 per cent to stand at 14.98.
Some in the markets sought to play down Wednesday’s action.
“As painful as the sell-off may have seemed, it had none of the characteristics of a genuinely panicky pullback,” said Nicholas Colas, chief market strategist at Convergex.
“A Vix at 15.6 may be up from super-depressed levels, but plus-20 is the level that correlates with real warning bells.
“The right way to consider the move is as a warning shot to Washington, essentially saying: ‘What happens in DC doesn’t stay in DC’”
Viraj Patel, forex strategist at ING, suggested the “Trumpeachment” -led meltdown in global markets might have had a line temporarily drawn under it after the US Justice Department appointed former FBI director Robert Mueller as special counsel to lead an investigation into Russia’s role in the 2016 US elections.
“While the tail risk of a Trump impeachment is unlikely to fully recede, there needs to be another layer of bad news for markets to adversely react again,” Mr Patel said.
He added: “Fears over a delay to potential tax reforms may be overblown; a number of Republicans — including House Speaker Paul Ryan — have pledged to continue working on their policy agenda since the ‘Comey memo’ incident”.
The steadier tone on Wall Street helped European stocks pare early losses. The pan-regional Stoxx 600 ended 0.5 per cent lower, near the day’s high, having fallen as much as 1.2 per cent at one stage.
The FTSE 100 in London and Frankfurt’s Xetra Dax index — which both hit record highs this week — fell 0.9 per cent and 0.3 per cent, respectively.
Meanwhile, the Bovespa share index in Brazil was down 9.4 per cent and the dollar was up 8 per cent against the real amid concerns about the outlook for economic reforms in the country.
Other emerging market currencies also came under some pressure.
“The likelihood of President Michel Temer leaving office, either through impeachment or resignation, now looks high,” said Anna Stupnytska, global economist at Fidelity International.
“General elections are unlikely before 2018 due to constitutional constraints and vested interests, leaving Congress in an unproductive stasis. This will hurt growth, limit the central bank’s easing abilities, and be bad for Brazilian assets.”
The fragile tone in the markets was illustrated by very modest losses for “haven” assets.
The dollar was up just 0.2 per cent against the yen at ¥111.01 following a 2 per cent tumble in the previous session.
The yield on the 10-year US Treasury, which fell 11 basis points on Wednesday, was up just 1bp at 2.22 per cent while gold gave back just $4 of a $24 advance.
The 10-year German bond continued to rise, with the yield falling a further 3bp to 0.35 per cent.
The euro was down just 0.3 per cent at $1.1126, while sterling managed to climb 0.3 per cent to trade above $1.30 for the first time in nearly eight months after data showed UK retail sales rising more than expected last month.
Oil markets had a choppy session, with Brent crude falling as low as $51.11 a barrel before rallying to $52.63, up 0.8 per cent on the day.
Michel Temer was taped approving bribes to preserve the silence of the former Speaker of the lower house, O Globo newspaper reported