Brazil's Real Leads Losses in Latin America as Stocks Fluctuate

Brazil's Economy Contracts 1.9% in Second Quarter
  • Brazil's real posts widest swings among major currencies
  • Banks extend 2015 plunge, while Petrobras joins rally in oil

Brazilian stocks led world declines and the real slumped after data showed Latin America’s largest economy entered a recession, adding to concern corporate earnings will falter.

Real's Volatility Widest Among Major Currencies
Real's Volatility Widest Among Major Currencies

The currency traded near a 12-year low, showing the widest swings among major tenders, and the Ibovespa was set for the worst month this year as the national statistics agency reported a back-to-back quarterly contraction in gross domestic product. The 1.9 percent economic slump in the three months through June 30 was the biggest in more than six years and trailed economists’ projections. Lenders including Banco Bradesco SA tumbled, while oil producer Petroleo Brasileiro SA surged with crude.

Traders are turning bearish on Brazilian markets as President Dilma Rousseff struggles to boost growth amid the highest interest rates in nine years, a sweeping graft scandal and the threat of a further slowdown of its top trading partner. More than half of the companies in the Ibovespa reported second-quarter revenue that trailed estimates, according to data compiled by Bloomberg.

‘Perfect Storm’

“It’s the perfect storm,” Pablo Spyer, a director at Mirae Asset Wealth Management, said from Sao Paulo. His firm oversees 4.5 billion reais ($1.3 billion). “Everybody knew that Brazil’s economy was contracting, but today’s numbers show the scenario is even worse -- we may not have reached the bottom yet. Companies are already suffering, and we don’t see improvement any time soon.”

The Ibovespa fell 1.2 percent to 47,153.87 at the close of trading in Sao Paulo, extending this month’s slump to 7.3 percent and paring a weekly gain to 3.1 percent. The real lost 0.8 percent to 3.5815 per dollar. One-month implied volatility on options for the currency, reflecting projected shifts in the exchange rate, increased to 19.55 percent. Brazil’s bond risk, as measured by credit-default swaps, rose for the first time in four days.

All 10 groups in the MSCI Brazil index of stocks retreated, led by financial shares. Utility Cia. de Saneamento Basico do Estado de Sao Paulo, known as Sabesp, slumped after being cut to junk by Moody’s Investors Service. Petrobras extended a four-day rally to 16 percent.

Tax Speculation

Stocks and the real also retreated on speculation that the government is planning to bring back a tax payable on all financial transactions that was removed in 2007. The measure would be part of the plan to shore up the budget and avoid a credit rating rating downgrade.

Moody’s Investors Service cited lack of political consensus on attempts to repair government finances as well as a faltering economy when it lowered Brazil to the lowest level of investment grade this month. Standard & Poor’s cut its outlook for the nation in July, moving a step closer to reducing its rating to junk.

To make matters worse, the central bank released fiscal data Friday showing the budget deficit before interest payments last month was worse than forecast by all economists surveyed by Bloomberg. The so-called primary deficit reached 10 billion reais ($2.8 billion) in July, and amounted to negative 0.89 percent of GDP over the prior 12 months. Brazil targets a 2015 primary surplus of 0.15 percent of GDP.

"The government’s efforts to consolidate the budget is a step needed to stabilize the fiscal base in Brazil,” said Ipek Ozkardeskaya, a market analyst at London Capital Group Ltd. “However, given the slowdown in the economy, tightening fiscal conditions are a growing challenge.”

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