Brazil Real Falls as Stocks Hit 6-Year Low on Recession Forecast

2016: More Turbulence for the Markets?
  • Manufacturing at Brazil's top trading partner weakened
  • Largest Latin America economy forecast to shrink 2.95% in 2016

Brazilian stocks fell and the real dropped for a fourth session as forecasts showed Latin America’s largest economy is heading to its deepest recession in more than a century.

The real dropped 2 percent to a three-month low of 4.0399 per dollar Monday after a manufacturing slump in China, Brazil’s top trading partner, triggered a global selloff that halted equity trading in Shanghai. The benchmark Ibovespa equity gauge fell to the lowest since 2009.

"Chinese demand is very important for Brazil, so negative sentiment there sends ripples everywhere," said Georgette Boele, an Amsterdam-based analyst at ABN Amro Bank NV.

A factory index showing that manufacturing weakened for a fifth month in China is weighing on the outlook for Brazil, as a new survey from the central bank showed economists are forecasting the worst recession since 1901. The real posted the biggest decline among 16 major currencies in 2015, with a 33 percent tumble, as the government struggled to balance the budget amid efforts to impeach the president.

Meanwhile, policy makers are trying to control the fastest inflation rate in 12 years without further hamstringing a weak economy. Inflation is forecast to reach 7.09 percent this year, according to the weekly survey of about 100 economists published Monday. The government’s target is 4.5 percent, plus or minus 2 percentage points.

The Ibovespa lost 2.8 percent to 42,141.04, as all but five of the gauge’s 61 stocks dropped.

Brazil’s economy will shrink 2.95 percent this year, according to the poll, versus a prior estimate of a 2.81 percent contraction. Analysts have lowered their 2016 growth forecast for 13 straight weeks and estimate that gross domestic product contracted 3.71 percent last year.

The manufacturing "contraction in China draws a daunting scenario for Brazilian exporters, while the complicated domestic scenario keeps weighing on assets across the board," said Vitor Suzaki, an analyst at brokerage Lerosa Investimentos in Sao Paulo. "Everywhere you look, there’s reason for concern and there is not much hope of an improvement any time soon."

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, dropped 0.11 percentage point to 15.76 percent.

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