• Lula phone tap renews doubt over president's future in Brazil
  • Assets extend rally on report court suspends Lula nomination

Brazil’s stocks led global gains and the real rallied on speculation there will be a change in government after the release of a phone recording that allegedly showed President Dilma Rousseff trying to shield her predecessor from prosecution in a corruption scandal.

Brazilian assets rallied on bets the chance of impeachment is growing, spurring optimism that a new administration could halt a political quagmire that’s prevented Congress from focusing on pulling Latin America’s largest economy out of recession. Stocks, bonds and the real extended gains after a federal judge issued an injunction to suspend the appointment of Luiz Inacio Lula da Silva as chief of staff. The nomination was seen as a maneuver to keep Rousseff in power, and investors were concerned it would lead to more spending to stimulate growth.

“Dilma Rousseff’s room for maneuver is extremely narrow,” said Regis Chatellier, the director for emerging-market credit strategy at Societe Generale in London. “A change in government would certainly support Brazilian assets. I remain largely overweight Brazil at this stage.”

All the political chaos has amplified swings in the nation’s assets, sending the Ibovespa’s volatility to the highest level in more than a year. Rousseff, the least popular president in the nation’s modern history, has struggled to shore up the budget as Brazil faces its deepest contraction in a century and a corruption investigation ensnares corporate executives and high-ranking politicians. Lower house speaker Eduardo Cunha said the impeachment commission will be installed at 7 p.m. local time, and added that he expects a vote in 45 days.

The Ibovespa jumped 6.6 percent 50,913.79 at the close of trading in Sao Paulo, the most since January 2009, led by lenders Itau Unibanco Holding SA and Banco Bradesco SA. Trading volume with stocks was almost the double this year’s daily average. The real rose 3.1 percent to 3.6280 per dollar, briefly paring gains after the central bank said it sees room to partially unwind a swap program intended to bolster the currency. Brazil’s 2025 notes climbed as the cost of protecting Brazil’s bonds against nonpayment using five-year credit-default swaps tumbled the most since December 2014.

Rousseff came under increased pressure after federal police briefly detained her predecessor for questioning on March 4, and state prosecutors charged him with money laundering and hiding assets. By earning a Cabinet post, only the Supreme Court could authorize his imprisonment and trial. Tension escalated on Wednesday after Federal Judge Sergio Moro released phone recordings of a conversation between Rousseff and Lula, obtained through a police wire tap.

The latest developments were cheered by investors around the world as thousands of protesters in major Brazilian cities rallied asking for Rousseff’s removal and Lula’s arrest. The iShares MSCI Brazil Capped exchange-traded fund, a proxy of international investors’ sentiment toward Brazil, surged the most since 2008. Stocks of state-controlled companies including oil producer Petroleo Brasileiro SA and lender Banco do Brasil SA soared at least 12 percent.

“Prospects for a change in government should benefit state-owned companies,” Celson Placido, an economist at XP Investimentos, Brazil’s biggest brokerage, said from Porto Alegre. “But politics is always very uncertain, so we should prepare for a lot of volatility on the market before a solution for this turmoil is reached.”

This month’s rally in Brazilian assets have sent both the Ibovespa and the real above technical levels that could signal that a security has risen too much and is be poised for declines. Some of the world’s biggest investment banks including Goldman Sachs Group Inc. and Banco Mizuho do Brasil SA have said that for a fresh rally to take hold, there needs to be a solid indication that Brazil is on the path to recovery.  The advance is not a game changer and doesn’t change the fact the economy is in a “depression,” said Will Landers, a money manager at BlackRock Inc., the world’s largest asset manager.

“Even if the political situation is incredibly messy, we are probably at the worst point now,” said Koon Chow, a strategist at Union Bancaire Privee in London. “Because we are at the worst point, from a market’s perspective, we need to be quite careful.”

Still, traders bet that a new leadership is just what Brazil needs to end the recession and reverse a record fiscal deficit that already resulted in the country losing its investment-grade credit rating last year.

“There are a lot of other things that need to happen, but I think the markets would be very positive toward that change and I think there’s still some upside” in Brazilian assets, said Gregory Lesko, a money manager at Deltec Asset Management LLC in New York.

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