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Volatility for all things Brazilian is surging on Temer crisis

Buckle up, investors: Brazilian assets are heading for some serious volatility.

Volatility for all things Brazilian is surging on Thursday as investors — who piled into the country’s stocks and currency over the past 18 months on reform hopes — now brace for the prospect of another political crisis in the country, following allegations that President Michel Temer had been taped endorsing bribe payments.

Although the real has trimmed some of its earlier losses to trade 7 per cent lower against the dollar at publication time, the one-month implied volatility on the currency — a gauge of how much money investors are willing to pay to insure against the real’s swings over the next 30 days — is up more than 74 per cent at 23.39. This is a level last seen during the dark days of late 2015 and early 2016 when Brazil was in the throes of a spiraling economic crisis, and the government was paralysed by the impeachment saga surrounding former president Dilma Rousseff.

A similar gauge for the Bovespa stock market is also up more than 30 per cent to a 13-month high of 30.43.

The ferocity of the sell-off can been seen in the market moves.

At its session lows, the real was down nearly 9 per cent, and the Bovespa was down nearly 11 per cent, matching the kind of one-day losses seen during the global financial crisis in 2008. Circuit breakers on the Bovespa were triggered in the opening minutes of trade this morning.

Bond yields have also surged, with the yield on the 10-year sovereign dollar bond up as much as 53 basis points today. The cost of insuring Brazilian government debt against default also jumped 55 basis points to a five-month high of 264.23.

“For financial markets, the focus should be in assessing what this means for the economic outlook, and in particular the outlook for the reform agenda currently making its way through Congress,” said Gustavo Rangel, chief Latin America economist at ING.

“Ultimately, unless political uncertainties are resolved quickly, the economic outlook for the next two years is likely to be severely altered, with prospects for a recovery dwindling amid overwhelming political uncertainties.”