Wednesday
November 22, 2017
Friday, May 19, 2017

New Temer scandal rattles markets in Brazil, Argentina

A trader reacts as he works at Mirae Securities in São Paulo, Brazil, yesterday.
A trader reacts as he works at Mirae Securities in São Paulo, Brazil, yesterday.
A trader reacts as he works at Mirae Securities in São Paulo, Brazil, yesterday.

Stocks and currencies nosedive as investors scramble in response to corruption allegations involving Brazilian president

Brazilian markets plummeted yesterday as allegations that President Michel Temer condoned bribes to silence a key witness deflated investor optimism about the prospects for his ambitious pension and labour reform agenda. That pessimism spread to Argentina, which saw declines in stocks markets and a jump in the value of the US dollar against the peso.

Brazil’s benchmark Bovespa stock index closed 8.8 percent lower, its biggest daily decline since the 2008 financial crisis. Trading had been halted for an hour after a 10 percent drop triggered a circuit-breaker mechanism.

Blue-chip stocks such as lender Itaú Unibanco Holding and state-controlled oil company Petróleo Brasileiro SA (PETR4.SA) dragged the index lower.

The declines slashed 26 billion reais (US$7.7 billion) off the individual market values of Itaú and Petrobras.

Temer was caught on tape encouraging a prominent executive to pay a monthly fee to keep jailed former House Speaker Eduardo Cunha silent in the country’s biggest-ever graft probe, sources said on Wednesday, confirming a report in newspaper O Globo.

“Brazilian stocks and assets and their currency have rallied very strongly up until really today. It’s a big pullback and ... it at least brings the risk up to the surface again,” Alliance Bernstein Managing Director of Equity Product Management Eric Sprow said.

The report threatened to torpedo a two-year rally in Brazilian assets as traders quickly reassessed the chances of success of efforts to streamline the country’s social security system and reform labour regulations. As a result, policymakers’ attempts to curtail the growth of public debt and foster economic growth may also be in doubt.

Strategists at JPMorgan Securities and UBS Securities downgraded their recommendations on Brazilian equities to “neutral,” citing increased risks to the implementation of structural reforms.

Trader Thiago Castellan at São Paulo-based Renascença brokerage said: “For the market, it’s not a question of whether Temer will be ousted or not. The question is whether it will be quick and for how long reforms will be delayed.”

Temer denied the allegations, saying he will not resign. His remarks disappointed traders who had hoped for a swift resolution to the political crisis, putting renewed pressure on Brazilian stocks and currencies going into the close.

The Merval stock index in Buenos Aires declined by 2.9 yesterday in response to the Brazilian fluctuations, with Petrobras leading the downwards slide of 13.1 percent. Petrobras has the biggest weight on the Merval index and as such it has a large impact on the overall result. The Brazilian energy company was accompanied by Aluar, which declined 3.8 percent and Comercial Plata 4.2 percent.

However, Tenaris saw its stock prices increase by 3.92 percent. The industrial company was one of four in the index that saw increases in its prices on a day when prices fell across the board.

The instability in Brazil has compounded concerns emanating from Washington related to scandals enveloping US President Donald Trump.

In similar fashion, the US dollar strengthened against the peso by the highest single-day amount since Brexit. The slide of the peso means that the dollar is now at its strongest since January 5, reversing the appreciation of the peso against the greenback. As of yesterday, the peso had lost 0.5 percent against the dollar through 2017. After strengthening against the dollar after January, the peso depreciated by 3.2 percent in April.

Argentina’s country risk jumped 2.9 percent yesterday on account of the instability and some of the provinces looking to issue debt have decided to bide their time to make sure that conditions are optimal.

POLICYMAKERS SPRING

TO ACTION

The Brazilian real slumped by eight percent to 3.38 reais, the biggest percentage drop since the currency was devalued in 1999, wiping out its gains in 2017, while bond prices tumbled.

Strategists at Credit Suisse Securities revised forecasts for the Brazilian real, saying the reform agenda was likely to be put on hold. They expect the currency to weaken to 3.50 in three months and 3.70 in 12 months, up from 3.20 and 3.50 previously.

The sharp moves drove the market operator B3 to widen the limits on trading of several derivatives and put policymakers on alert.

The Central Bank sold US$4 billion worth of new traditional currency swaps, increasing the stock of outstanding swaps by nearly a fourth from the current US$17.7 billion.

Over the last two years, the bank has acted to reduce the amount of swaps, which function like future dollar sales to investors, from more than US$100 billion by late 2015, to cut taxpayers’ exposure to currency moves and limit market imbalances.

The National Treasury also swept to action, calling off an auction of fixed-rate and floating-rate bonds scheduled for yesterday and offering to buy or sell local notes in three extraordinary auctions in coming days.

Yields paid on Brazilian interest rate futures spiked as traders bet the Central Bank would be forced to cut rates at a slower pace as the reforms outlook dimmed.

Rate futures prices indicated traders saw a 79 percent chance that the Central Bank would cut the benchmark Selic rate by 50 basis points this month and a 21 percent chance of a 75 basis-point reduction. On Wednesday, most bets pointed to a cut of 125 basis points.

Herald with Reuters

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