Brazil Real Leads World Losses as Ibovespa Sinks With Petrobras

  • Global selloff deepens as confidence in central banks wanes
  • Real's implied volatility is highest among major currencies

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Brazil’s real led world losses and stocks dropped on concern that the turmoil in global financial markets will deepen the malaise of Latin America’s largest economy.

The real erased this year’s advance while the Ibovespa extended a three-day slide, and a plunge in crude sent oil producer Petroleo Brasileiro SA tumbling. Lender Itau Unibanco Holding SA contributed the most to the stock gauge’s decline, and miner Vale SA slumped with iron ore.

Emerging markets joined a global rout even as Federal Reserve Chair Janet Yellen suggested that additional interest-rate increases might be delayed and after central banks from Europe to Japan signaled that additional stimulus is at the ready. The lack of confidence from global investors added to an already fragile economic scenario in Brazil, which is in the midst of its deepest recession in a century.

“The last thing Brazil needs, given all its problems, is for investors to lose faith in the policies of the world’s leading central banks,” said Nicholas Spiro, a partner at London-based Lauressa Advisory Ltd. “Yet this is precisely what’s happening.”

The Ibovespa fell 2.6 percent to 39,318.30 at the close of trading in Sao Paulo, as all but five of its 61 stocks retreated. Its price-to-book ratio is below 1, a valuation level that indicates investors believe the nation’s biggest companies are worth less than their net assets. The real dropped 1.6 percent to 3.9925 per U.S. dollar. Its three-month implied volatility, a projection for currency swings, advanced 0.75 percentage point to 21.3 percent, the highest in the world.

Brazil’s currency has room to depreciate further and approach 4 per dollar, driven largely by external concern rather than domestic turmoil, Georgette Boele, a foreign-exchange analyst at ABN Amro Bank NV, said from Amsterdam. Verde Asset Management, the investment firm that has Credit Suisse Group AG and money manager Luis Stuhlberger as shareholders, is betting on the dollar against the real amid increasing inflation woes, according to a statement published on its website Wednesday.

“We’re surprised by the fact that the real is one of the world’s best-performing currencies in 2016," the note said. "We believe this is temporary, especially given that in Brazil inflation is running much faster than in its peers.”

Brazil’s consumer price increases continued accelerating in January, rather than reversing course as expected. That followed a controversial central bank decision to hold borrowing costs unchanged. Policy makers cited the economic malaise and external uncertainties as justification for the decision.

Brazil is likely to freeze as much as 30 billion reais ($7.6 billion) in spending as it struggles to shore up its finances, Folha de S.Paulo newspaper reported Thursday, without saying how it got the information. The cuts would be below 20 billion reais, newspaper Valor Economico reported, without saying how it got the information. The announcement of the freeze may happen as soon as Friday, the reports said.

Swap rates on the contract maturing in January 2017, a gauge of expectations on interest-rate moves, advanced 0.06 percentage point to 14.48 percent.

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