Tombini Signal Sinks Brazil Stocks as Swaps Jump to 6-Year High

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The Ibovespa halted a two-day gain on bets policy makers will boost interest rates even as Latin America’s largest economy heads toward the worst recession in 25 years.

The stock gauge erased an earlier rally while credit-card processor Cielo SA, which gets most of its revenue from Brazil, slid. The central bank, led by President Alexandre Tombini, said in the minutes of its June meeting that the advances in fighting inflation aren’t enough. For traders, that was a signal borrowing costs will rise further, curbing the outlook for equities. Swap rates jumped to a six-year high.

“Higher rates could make things a little worse for stocks,” Joao Pedro Brugger, a money manager at Leme Investimentos, which oversees 500 million reais ($158.4 million), said by phone from Florianopolis, Brazil. “For now, the pessimism prevails. The market will wait for the government to put in practice everything they’ve been announcing.”

Brazilian shares had entered a bull market in April, after rallying more than 20 percent from their 2015 low, on speculation government measures to shore up the budget would restore confidence and help Brazil keep its investment-grade credit rating. Since then, the benchmark stock gauge has slipped 5.1 percent amid bets the economy will slow further.

The Ibovespa dropped 0.3 percent to 53,688.52 at the close of trading in Sao Paulo. It earlier rose as much as 0.7 percent. Cielo slumped 2.8 percent. Swap rates on the contract maturing in January 2017 increased 0.13 percentage point to 13.89 percent, the highest level since December 2008.

Swap Market

Traders in the swap market forecast the central bank will boost borrowing costs at least twice more this year as economists forecast consumer prices above the target range for the first time since 2003. Relative price adjustments “will make inflation rise in the short term and tend to remain high, requiring determination and perseverance to prevent its transmission to longer terms,” the central bank said.

The minutes contain “no suggestion” that policy makers are ready to halt the increases in borrowing costs, Neil Shearing, the chief emerging-markets economist at Capital Economics Ltd. in London, wrote in an research note.

The central bank board voted unanimously last week to lift the benchmark interest rate by 0.5 percentage point to 13.75 percent, the highest since January 2009. Brazil is the only member of the Group of 20 nations raising borrowing costs this year.

On the same day, Moody’s Investors Service said that Brazil’s ratio of debt to gross domestic product is already high relative to similarly-rated countries and will probably increase as the economy contracts and borrowing costs rise.

Homebuilder Gafisa SA and retailer Cia. Brasileira de Distribuicao, also known as GPA or Pao de Acucar, sank more than 2.2 percent. Vale SA, the world’s largest iron-ore producer, gained as the steelmaking ingredient climbed to a five-month high.

Trading volume of equities in Sao Paulo was 6.6 billion reais on Thursday, according to data compiled by Bloomberg. That compares with a daily average of 6.95 billion reais this year, according to the exchange.

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