Brazilian markets steadied on Friday, a day after explosive allegations that the country’s president authorised payments to buy the silence of an ally over a corruption investigation triggered one of the most savage one-day sell-offs in recent memory.
The Brazilian real suffered its biggest one-day drop in nearly 15 years Thursday amid investor panic that the country could face another economically disruptive change of president. The currency has since clawed back 2.7 per cent to trade at R$3.28 per dollar. At its session low on Thursday, the currency saw its 2017 gains wiped out after falling as much as 8 per cent to R$3.41.
Brazil bulls also took advantage of yesterday’s sell-off to load up on Brazilian stocks. The Bovespa, which saw trading briefly halted on Thursday after plunging more than 10 per cent, was up nearly 3 per cent in Friday morning trading. But in a sign that investors are bracing for turbulent times ahead, the one-month implied volatility for the index — a gauge of how much money investors are willing to pay to insure against its swings over the next 30 days — climbed for a second day to a near two-and-half-year high of 49.53.
Other asset classes, including bonds and ETFs, also recouped some of their losses on Friday.
President Michel Temer has denied any wrongdoing and defied calls to step down. However, the allegations risk derailing the deeply unpopular but much-needed reforms that Mr Temer has been trying to push through, and come just as the country was showing tepid signs of emerging from two years of deep recession.
“Without clear and strong government leadership to spearhead the effort in Congress, progress on the voting process is likely to come to a halt,” said Gustavo Rangel, chief Latin American economist at ING. “Without progress on the legislative agenda…the economic outlook for the next two years is likely to be severely altered, with prospects for a recovery dwindling amid overwhelming political uncertainties.”
The view was echoed by analysts at UBS, who cautioned that the biggest risk for Brazil now is a return to the kind of prolonged political uncertainty that paralysed the government between mid-2015 and mid-2016.
“In our view, the important question will be when, and not how, the current state of acute political uncertainty is resolved,” they said.
“The most benign scenario, in our view, would involve a quick and definitive refutation of the charges. A less market-friendly scenario would involve the president’s resignation, followed by the election of a caretaker president who would maintain the current economic team in place and attempt to reboot the reform effort. This would still create near-term uncertainty. A more negative scenario would see prolonged political uncertainty as the country would face another impeachment process with potentially rising social tensions.”