Petrobras Triggers Ibovespa Tumble as Central Bank Supports Real

Updated on
  • Bond risk rises to highest since 2009 amid budget turmoil
  • Currency ends six-day losing streak as Brazil intervenes

Petroleo Brasileiro SA helped drag Brazil’s main stock index to the biggest drop in the world after earnings trailed forecasts for the state oil company at the center of a burgeoning corruption scandal.

The real ended a six-day losing streak, climbing from a 12-year low after the central bank stepped up support for the currency and cautioned that its plunge over the past year wasn’t justified. Bond risk rose to the highest since 2009 as political turmoil and a contracting economy threatened efforts to pare budget deficits and avoid a junk credit rating.

“The mood is very negative in the Brazilian markets now,” Joao Piccioni, an equity manager at Petra Asset, said from Sao Paulo. “We see aversion to risk causing a big selloff everywhere: stocks, the real and bonds. Investors seem very concerned about the economic deceleration and political instability.”

The Ibovespa fell 3 percent to 48,531.71 at 4:22 p.m. in Sao Paulo, extending its drop this week to 4.6 percent. Shares of Petrobras dropped 5.7 percent as a slide in crude damped prospects for offshore exploration. The cost of protecting Brazil’s bonds against nonpayment using five-year credit-default swaps rose to 3.26 percentage points. The real gained 0.7 percent to 3.5098 per dollar. It’s still down for seventh straight week in the longest stretch of losses in almost seven years.

Swap rates, a gauge of expectations for changes in Brazil’s borrowing costs, rose to the highest level since 2008 after report showed faster-than-forecast inflation. The MSCI index for Brazilian consumer staple stocks fell to its lowest level in almost five years on concern the central bank will keep interest rates high.

JBS SA dropped the most on the consumer index, falling 3.9 percent as faster-than-forecast inflation damped prospects for the meatpacker and other companies that depend on consumer demand. The supermarket and electronics chain Cia. Brasileira de Distribuicao slid 3.5 percent to a one-month low. Brewer Ambev SA lost 2.1 percent.

Consumer prices climbed at a faster pace in July, rising 9.56 percent from a year earlier. The official inflation target is 4.5 percent, plus or minus 2 percentage points.

The central bank supported the real by extending the maturity on 11,000 foreign-exchange swap contracts, up from 6,000 contracts daily earlier this month, after officials said the foreign-exchange rout was overdone.

‘Political Situation’

“The current level of the exchange rate is way above what could be explained by the economic fundamentals of Brazil, even taking into account the delicate political situation,” Monetary Policy Director Aldo Mendes said Thursday, according to a statement read by his press office over the phone.

The currency tumbled 9 percent in July as Standard & Poor’s changed its outlook on Brazil’s debt to negative, citing budget deficits and economic contraction when it said it may reduce the nation’s credit rating to junk from the lowest level of investment grade.

The decline in President Dilma Rousseff’s popularity and her lack of support from Congress to approve measures to improve the country’s fiscal accounts are contributing to risk, according to Ignacio Crespo, an analyst at Guide Investimentos in Sao Paulo.

“Rising credit-default swaps show that investors think it’s riskier to put money into Brazil,” he said in a phone interview. “The political crisis will expand, and risk aversion may prevail in the medium term.”