Ibovespa Leads World Declines as Impeachment Euphoria Fizzles

  • Currency reversed losses on strong inflow from foreigners
  • Petrobras tumbles as crude oil trades near $40 a barrel

Brazil’s stocks led losses among world major benchmarks on speculation that the political crisis that has paralyzed Latin America’s largest economy is nowhere near the end. The real erased declines amid foreign inflows.

The Ibovespa extended a weekly drop on wagers that the process to impeach President Dilma Rousseff may take months and involve several votes in Congress. Oil producer Petroleo Brasileiro SA contributed the most to the gauge’s slump as a drop in crude to $40 a barrel dimmed the outlook for its offshore investments. Steelmaker Gerdau SA was the worst performer on the index after a newspaper reported it was cited in a corruption investigation. The real gained for a fourth day.

Brazilian assets had surged on Thursday amid speculation that a Rousseff impeachment could finally put an end to a political stalemate that has prevented lawmakers from focusing on measures to pull the nation out of recession. Still, Moody’s Investors Service and Fitch Ratings said the process could instead add to political uncertainty, further hurting the economy.

“Markets are desperate to see some sort of a political breakthrough in Brazil, yet investors should be careful what they wish for,” said Nicholas Spiro, a London-based managing director at Spiro Sovereign Strategy. “Just because Rousseff has become a liability as far as reforms are concerned, it does not mean that impeaching her will help shore up the economy."

The Ibovespa fell 2.2 percent to 45,360.76 at the close of trading in Sao Paulo, extending its weekly loss to 1.1 percent. The real added 0.2 percent to 3.7525 per dollar. Swap rates on the contract maturing in January 2017, a gauge of expectations for interest-rate moves, rose 0.01 percentage point to 15.77 percent.

Traders have pushed down the value of Brazilian assets this year as the government struggles to shore up the budget and prevent further credit-rating cuts amid a widening corruption scandal and prospects for the longest recession since the 1930s. Meanwhile, the central bank has boosted borrowing costs to the highest since 2006, depressing demand and boosting unemployment, while failing to tame double-digit inflation.

The attempt to oust Rousseff, triggered by the lower house president Wednesday, is based on accusations that she’s breached Brazil’s fiscal responsibility law in 2014 and 2015, including doctoring fiscal accounts. Two of three motions to stop the impeachment filed by president’s allies before the country’s top court were denied late Thursday, and speeches by political leaders for and against the proceeding signal a protracted battle ahead.
The president has denied any wrongdoing and said the arguments in favor of impeachment were groundless.

The real extended this week’s rally as the market saw “some inflows from foreigners supporting the currency,” said Joao Paulo de Gracia Correa, a foreign-exchange director at SLW Corretora de Valores, in Curitiba, Brazil. Still, its one-month implied volatility, reflecting projected shifts in the exchange rate, was 19.8 percent, the highest among 16 major currencies tracked by Bloomberg.

"Defenders of the impeachment scored one goal in the first minute of the first round of the game," Raphael Figueredo, an analyst at brokerage Clear Corretora, said from Sao Paulo. "There’s still a lot that could happen along the way. We don’t know what the outcome will be, so much more volatility in the markets is expected."

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