Brazilian market at the mercy of politics

Bloomberg

For about a half hour, it looked like Brazil’s world-beating rallies were coming undone.
A few minutes before noon on a relatively calm trading day in Sao Paulo, the real suddenly plummeted by the most in four years and $16.5 billion was wiped off the value of the benchmark stock index. Within 30 minutes, both markets had mostly recovered.
The crash and rebound illustrate the tenuous nature of the gains this year in Brazil, where the Ibovespa and currency are among the world’s top performers on bets that President Dilma Rousseff will be impeached and replaced by an investor-friendly government. That thesis was called into question mid-day Monday when the interim head of the lower house unexpectedly called for a new impeachment vote in his chamber, even though he reversed his decision later.
The original announcement spurred panic among investors who had considered Rousseff’s ouster a foregone conclusion. Relative calm returned as traders decided it was just a temporary setback. It follows months of discord and uncertainty as the effort to impeach Rousseff moved through the courts and won approval in the lower house. The real’s three-month implied volatility, a gauge of price swings, is the fourth-highest in the world, and the Ibovespa has the biggest ups and downs among the largest equity gauges.
“The whole impeachment process will continue to be turbulent and uncertain,” Enestor dos Santos, the principal economist at Banco Bilbao Vizcaya Argentaria SA in Madrid, said before the interim lower house chief reversed his call. “This is a letdown. The market wants to be sure of what the process will be like.”
The Ibovespa ended the day down 1.4 percent, reaching the lowest closing level since April 11, as the real slipped 0.4 percent. Brazilian stocks have returned 31 percent this year in dollar terms, the most among the world’s major markets, while the real’s 13 percent advance is the biggest among about 150 currencies tracked globally by Bloomberg.
This week, investors were focused on the Senate, where lawmakers were scheduled to vote Wednesday on whether to proceed with the impeachment and demand Rousseff step down for at least 180 days while allegations that she used state banks to illegally shore up the budget are considered. After that, senators would take another vote on permanently removing her from office.
The Senate’s vote this week will proceed, the head of the chamber, Renan Calheiros, said Monday after interim lower house chief Waldir Maranhao said he had annulled last month’s impeachment vote in the lower house because of procedural irregularities. Maranhao later released a statement revoking his call to annul impeachment sessions in the lower house.
Even before Monday’s turmoil, there were signs that investors could be underestimating how difficult it will be to pull Brazil out of its worst recession in a century and overestimating how smooth a political transition would be. Brazil is still a country with unemployment at a four-year high, a ballooning budget deficit, inflation near 10 percent and a credit rating that puts the government on par with Guatemala.
This year’s rally represents a turnaround from 2015, when the Ibovespa plunged 42 percent in dollar terms and the real gave up a third of its value as the country lost its investment-grade credit rating. Brazil, a global superstar a half a decade ago when its economy was rapidly expanding, has suffered with a plunge in the prices of its commodity exports and a collapse in business confidence.
The chaos shows the dysfunction within Brazil’s institutions, “with every branch of government pitched against each other and with even factions within the same branch also in conflict,” Rafael Elias, the head of emerging markets strategy at Cantor Fitzgerald in New York, wrote in a note to clients.