Ibovespa Leads Americas Losses on Moody's Cut as Real Advances

  • Vale and Itau among biggest contributors to gauge's slide
  • Currency erases drop as commodity gain bolsters export outlook

The Ibovespa led losses in the Americas after another credit rating cut to junk spurred speculation the country will struggle to shore up its finances amid the worst recession in a century. The real erased its decline as commodities gained.

Brazil’s benchmark stock gauge slumped for a second day after the nation lost its investment grade at Moody’s Investors Service. Lender Itau Unibanco Holding SA extended this year’s slide while Vale SA, the world’s largest iron-ore producer, sank 4.4 percent. The real was little changed, after dropping as much as 1.2 percent, as a rally in raw materials bolstered the revenue outlook for the commodity-exporting country.

Traders have pushed down the value of Brazilian assets over the past year as President Dilma Rousseff failed to prevent further credit downgrades after Standard & Poor’s cut the nation to junk in September, in a move followed by Fitch Ratings and Moody’s. The least popular president in Brazil’s modern history has faced political resistance to the approval of the fiscal adjustments needed to close a budget gap amid a widening corruption scandal.

“What surprises me is how long it took for Moody’s to act,” said Daniel Weeks, the chief economist at Garde Asset Management in Sao Paulo. “The cut reflects everything everybody already knew: Brazil’s economy is going from bad to worse, the country is paralyzed by a political crisis and we don’t have any signal of improvement.”

The Ibovespa slumped 1 percent to 42,084.56 at the close of trading in Sao Paulo as 44 of its 61 stocks retreated. The gauge traded at 3.8 times its Ebitda, approaching the lowest valuation since 2009, according to data compiled by Bloomberg. The real rose less than 0.1 percent to 3.9577 per dollar. The iShares MSCI Brazil Capped ETF, the nation’s largest exchange-traded fund, slipped 0.8 percent to $20.39.

Brazilian shares also followed a rout in emerging markets amid concern over a further slowdown of the Chinese economy. The Asian nation is Brazil’s top trading partner.

The default risk for Brazil’s corporate bond issuers will remain high this year and next after surging to a record in 2015 as a recession in Latin America’s largest economy deepens, according to Fitch Ratings.

“The Brazilian government has limited tools to ease the pain given its precarious financial position and political paralysis,” Joe Bormann, the deputy regional group head for Latin America corporates at Fitch, wrote in a guest commentary for Bloomberg Brief’s regional newsletter. “The path forward looks dismal.”

All 10 groups in the MSCI Brazil index dropped as a measure of financial shares extended a two-day slide. Itau declined 0.8 percent. State-controlled lender Banco do Brasil SA slumped 3.3 percent after saying it will cut its 2016 dividend payout to 25 percent of net income from 40 percent last year.

Sugar producer Cosan SA and the logistic arm of the group of which its part, Cosan Logistica SA, rallied as the price of the commodity advanced.

Swap rates on the contract maturing in January 2017, a gauge of expectations for Brazil’s interest rates, fell 0.035 percentage point to to 14.17 percent.

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