First it was a collapse in the currency. Now the rest of Brazil’s financial markets are in the cross-hairs as investors lose faith in the government’s ability to contain a deepening fiscal crisis. The selloff that sent the real plunging to a record low is engulfing everything from stocks to local-currency debt to dollar bonds, with traders even piling into hedges against a sovereign default.
Market watchers say extraordinary measures on Tuesday by the central bank to stem the currency’s slide are little more than a temporary fix, and warn that lawmakers’ moves to water down a high-profile austerity package are likely to only add to the turmoil. The widening rout shows how investors are increasingly skeptical that President Luiz Inacio Lula da Silva is serious about reining in a soaring fiscal deficit. Brazil is running an annual budget gap of 10% – far wider than the ones seen during the leftist president’s first administration.
The real has been the worst-performing currency in the world over the past four sessions, adding to a 21% drop this year against the greenback. The benchmark Ibovespa stock index – Latin America’s largest – has fallen 3.8%. Swap rates jumped, dollar bonds tumbled the most in emerging markets after defaulted Lebanon, and five-year credit default swaps widened to their highest level in more than a year.
“It’s reached a crisis stage from a bond standpoint,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “Lula’s got to say something constructive.” Brazil’s lower house altered Lula’s spending proposal late Tuesday in ways that may further unnerve investors. While they approved the plan, which awaits a vote in the Senate, lawmakers struck a proposal that would have let the government restrict the use of tax credits by companies if finances worsen.
Swap rates climbed to a new session high after reversing an earlier drop prompted by Treasury auctions to buy and sell notes and bonds over the next three sessions in a bid to reduce volatility. Abandoned Bets As the currency selloff spread this week, strategists rushed to abandon bullish bets on the country’s assets. Over the past two days, JPMorgan Chase & Co. strategists ditched their positive view on Brazil’s dollar debt, while Credit Agricole SA exited its tactical overweight position on the real two weeks after entering the trade.
Investors clearly have thrown in the towel,” said Olga Yangol, head of emerging-markets research and strategy at Credit Agricole. Despite positive signs on growth and actions from the central bank, “the perception is that as long as the current president is in charge, he seems to be quite impervious to market gyrations.”