Brazil Stocks Fall as Impeachment Rally Stumbles on Weak Economy

  • Traders say gloomy outlook discourage further optimism
  • Lenders Itau, Unibanco contribute most to Ibovespa's decline

Brazilian stocks fell the most in a week as traders’ optimism regarding a possible change in government turned to concern over a weakening economy and continued political infighting.

Lenders Itau Unibanco Holding SA and Banco Bradesco SA contributed the most to the Ibovespa index’s decline on Wednesday after valuations hit their the highest in a year. State-controlled oil producer Petroleo Brasileiro SA and miner Vale SA followed commodity prices lower.

Stocks are retreating after a rally earlier this month sent the benchmark index to an eight-month high, fueled by bets that President Dilma Rousseff was closer than ever to being impeached, a development that could usher in a new government better able to close a crippling budget gap and pull Latin America’s biggest economy out of recession. That euphoria has lost steam as traders confront an unpleasant truth: Brazil’s economy is in serious trouble, with or without Rousseff.

"Investors are now waiting for real signs of improvement,” said Raphael Figueredo, an analyst at brokerage Clear Corretora in Sao Paulo. "The hope is still there, but there’s a limit to how far stocks can gain before the expectation turns into reality,"

The Ibovespa fell 2.6 percent to 49,690.05 at the close of trading in Sao Paulo as all but 10 of its 61 stocks declined. Itau and Bradesco dropped at least 3.2 percent. Vale lost 7.1 percent and Petrobras, as Petroleo Brasileiro is known, slid 4.1 percent.

After five consecutive weeks of gains, the Ibovespa is trading at 12.7 times estimated earnings, data compiled by Bloomberg show. That’s close to its most expensive level since May and 7.6 percent above the MSCI Emerging Markets Index’s valuation.

Economists forecast Brazil will contract 3.6 percent this year after the economy shrunk 3.8 percent in 2015. Unemployment in six metropolitan areas of the country rose to 8.2 percent in February, from 7.6 percent the prior month, the statistics institute said in a report Wednesday. That was the highest since 2009, and more than the 8.1 percent median forecast from economists surveyed by Bloomberg.

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