Brazil Real Rallies With Stocks as Rousseff Drops in Voter Poll

Brazil’s stocks, bonds and the currency rallied as a drop in President Dilma Rousseff’s approval rating fueled speculation she may struggle to win re-election after back-to-back years of sputtering growth.

The real appreciated 1.9 percent to 2.2589 per dollar at the close in Sao Paulo, the biggest gain among 24 developing-nation currencies tracked by Bloomberg. The Ibovespa benchmark equity index rose 3.5 percent to 49,646.79, the largest increase in six months. The gain in local bonds pushed yields on securities maturing in 2017 down 15 basis points, or 0.15 percentage point, to 12.25 percent.

The decline in Rousseff’s popularity comes three days after Standard & Poor’s lowered the nation’s credit rating to the lowest level of investment grade, saying sluggish economic growth and an expansionary fiscal policy are increasing the country’s debt. The central bank said in a quarterly report that inflation will accelerate for a second straight year even if it raises borrowing costs by another quarter-percentage point.

“Rousseff’s not recognizing the failure of her economic policy damps any optimism that she would reverse policy after the elections,” Siobhan Morden, the head of Latin America fixed income at Jefferies Group LLC, said in a phone interview from New York. “So the idea is that anyone replacing her would be better.”

The president’s approval rating fell to 51 percent from 56 percent, a poll conducted by CNI-Ibope shows. It was the first decline since July, when street protests pushed her popularity to a record low. Forty-two percent of those surveyed said Rousseff’s government was worse than that of her predecessor, Luiz Inacio Lula da Silva.

The presidential palace’s press office declined to comment on the market’s performance.

Inflation Outlook

The central bank said in its report that consumer prices will rise 6.2 percent this year even if policy makers boost the target lending rate rate by 25 basis points to 11 percent. That compares with a 5.6 percent increase that was projected in December’s report. Brazil’s economy will expand 2 percent in 2014, following 2.3 percent growth in 2013, the bank forecasts.

Brazil sold bonds in Europe for the first time since 2005, turning to international markets for financing the same week S&P cut the country’s credit rating to BBB-.

The 1 billion euro ($1.4 billion) offering of seven-year securities had a yield of 2.96 percent. The yield on 800 million euros of bonds sold in 2005 increased 12 basis points to 1.08 percent.

State-run companies including Centrais Eletricas Brasileiras SA and Petroleo Brasileiro SA rallied, with voting shares of Eletrobras rising 9.8 percent to 6.36 reais and Petrobras gaining 8.1 percent to 15.57 reais. Banco do Brasil SA climbed 6.6 percent to 22.51 reais in its biggest advance since July 2012.

Unemployment Report

Swap rates fell today after a government report showed unemployment increased in February to a four-month high of 5.1 percent, adding to speculation that the central bank will limit further increases in borrowing costs.

Brazil has raised the target lending rate by 75 basis points this year to 10.75 percent, the largest increase among major economies after Turkey. Policy makers have lifted borrowing costs by 3.5 percentage points since April 2013.

Swap rates on contracts maturing in January 2017 decreased 17 basis points to 12.27 percent, the lowest since Feb. 28.

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