Markets reeling in Brazil on deficit fears and political turmoil – News Couple

Markets reeling in Brazil on deficit fears and political turmoil

(Bloomberg) – Stocks, bonds and the Brazilian currency posted some of the worst returns in the world this month amid deteriorating public finances, deteriorating growth prospects and political turmoil.

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The benchmark Ibovespa index posted its fourth straight month of losses, its worst performance since 2014, and closed in a bear market on Friday, down 21% from its June peak. The rial weakened by more than 3.5%, the largest drop in emerging markets after the Turkish lira, and local bonds were also sold. The risk premium measured in five-year default swaps is at its highest level in more than a year.

Traders have a lot to worry about. Government pressure to extend welfare payments has put the maximum spending rule, a guarantee of financial stability, under threat, leading to resignations in the government’s economic team.

Rising consumer prices and the prospect of a broader fiscal deficit led the central bank to raise interest rates at the fastest pace in nearly two decades this week, potentially undermining an already faltering recovery. The jump in inflation, in turn, has put pressure on state-owned oil company Petroleo Brasileiro SA, with politicians including President Jair Bolsonaro blaming the company for high fuel prices eroding purchasing power.

“It’s clear that the news flow in Brazil has deteriorated,” said David Becker, Latin America equity analyst at Bank of America, in an interview. Baker, who downgraded Brazil to market weight from overweight in his Latin American portfolio earlier this week, expects higher interest rates to dampen growth.

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Assets continued to slide on Thursday, after the recent central bank rate hike failed to reassure investors. The country’s policymakers have been the most hawkish in the world this year, raising the benchmark interest rate by 5.75 percentage points since March. But some economists said it may need to be bolder to bring back inflation under control.

The news that the government may extend the Covid-19 cash aid into next year has also heightened investor concerns. Bolsonaro is pushing for a new social program as Covid distributions run out and his popularity wanes amid a weak recovery and rising prices. President Petrobras has repeatedly attacked, as the national oil company is known, sometimes saying he wants to curb rising fuel prices, and at other times saying the company should be privatized.

READ MORE: Bolsonaro considers more Covid postings as social programming halts

“Petrobras is raising prices because it has to comply with the law, and here we are trying to find a way to change the law,” Bolsonaro said Thursday on social media, criticizing the fact that the amount the company charges for fuel is currency-linked. fluctuations.

His comments sent the real currency, which was already the worst-performing currency in emerging markets, to decline even further. The stock market in Brazil was closed, but Petrobras deposit receipts in New York sank 6.3% in after-hours trading.

The company’s preferred stock fell more than 6% in Sao Paulo on Friday, with fresh criticism of Bolsonaro for higher fuel prices to offset Petrobras’ additional $5.6 billion payments to holders.

Read more: Bolsonaro faces fuel price pain with privatization talk

“You have a lot of people who have given up hope about the good direction for the country,” said Philip Torres, global co-head of emerging market debt at Aegon Asset Management in Chicago. “We need a better policy prescription and we need it fast.”

(Market updates move in the second paragraph)

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