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

Pablo Martinez Monsivais/AP Photo

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