Brazil Real, Stocks Lead World Losses as Political Outlook Sours

  • Investors are concerned crisis may endanger recovery plan
  • Commodity producers including Petrobras follow materials drop

The Slow Unraveling of Brazil, Explained in Two Minutes

Turmoil in Brazil’s politics sent the real and Ibovespa to the world’s biggest drop.

The currency fell 2 percent while the Ibovespa dropped 4.4 percent in dollar terms Tuesday in Sao Paulo as concern volatile politics will hamper efforts to revive growth exacerbated the effects of a global rout spurred by concern central banks will pare stimulus. The mastermind of former President Dilma Rousseff’s impeachment was kicked out of office last night on corruption allegations, fueling speculation he may name other lawmakers who committed wrongdoing and upend efforts to pass economic reforms.

After posting the world’s biggest gains this year on optimism a new government will shore up the budget and pull Brazil out of its worst recession in a century, the real and stocks have pulled back this month on concern the turnaround won’t be easy. The latest wrinkle occurred when lawmakers voted to expel former lower house chief Eduardo Cunha and ban him from office for eight years on charges he lied over holding Swiss bank accounts. Cunha denies wrongdoing, including accusations he stashed kickbacks in the accounts.

"This does potentially sour hopes that the majority of Brazil’s political uncertainties are behind us following Dilma’s impeachment," said Mike Moran, the head of economic research for the Americas at Standard Chartered Plc. "It’s not enough at this stage to upend the impeachment rally of this year but, coupled with the global backup in yields, will make it harder for the real to rally further from current levels."

The real closed at 3.3140 per dollar, the weakest since July 7, as the Ibovespa fell to a one-month low of 56,820.77. Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, climbed 0.13 percentage point to 12.68 percent.

Vale SA, the world’s largest iron-ore producer, slumped 6.9 percent. State-controlled oil producer Petroleo Brasileiro SA, known as Petrobras, lost 6.7 percent as crude prices declined after the International Energy Agency changed its view on the global oversupply, seeing a glut persisting into 2017. Energy and materials stocks were the worst performers among 10 industry groups on the MSCI Brazil Index as commodity prices sank. Raw-materials companies account for 23 percent of Ibovespa’s weighting, compared to 14 percent on the MSCI Emerging Markets Index, data compiled by Bloomberg show.

As the political outlook in the country gets more clouded, local investors have sold a net 244 million reais in stocks this month through Sept. 9, according to data from the exchange, while foreigners have acquired shares. The Ibovespa is trading at 12.7 times estimated earnings, the cheapest since July 13.

"There has been a lot of expectation regarding the recovery plan for a long time, but the market is afraid the measures won’t be put in place as soon as everybody wanted," Rafael Ohmachi, an analyst at brokerage Guide Investimentos, said from Sao Paulo. "The feeling is of frustration."

Increases in the real’s implied volatility, already the second highest after South Africa’s rand, could lead the central bank to reduce the volume of its daily foreign-exchange swap auctions, which tend to weaken the currency, according to analysts. After markets closed, the central bank announced it would auction just 5,000 reverse swaps on Wednesday, half of the amount offered in previous days.

Swings have increased in developing-nation currencies as investors weigh the outlook for global economic growth and prospects for further stimulus from central banks, with 10-day historical volatility on the MSCI Emerging Markets Currency Index almost quadrupling since the end of July.

Before it's here, it's on the Bloomberg Terminal.