The fact that Brazil’s markets is passing through uncertain times is well known. But the extent of investor concerns was exemplified by Thursday’s spectacular decline, sparked off by a news report. Later, it was revealed that the facts were not entirely true, but the damage had been done. Brazil’s benchmark and its currency real both declined considerably, underlining the fear stalking markets.
Lula Arrest Report Sparks Panic
The newspaper Folha de S. Paulo reported that former president Luiz Inacio Lula da Silva had filed a petition which is utilized as protection against illegal imprisonment. The “preventative habeas corpus petition” was received by the federal justice of the state of Parana.
This added to concerns over an investigation about corruption at Petrobras PBR.A. President Dilma Rousseff’s government has been threatened by this scandal recently. Recent developments have reduced market confidence even further. Last week, CEOs of two of the largest companies in the Latin American region were arrested on related allegations.
During the course of the day, Lula made a request that the petition be ignored. A court spokeswoman also revealed that the petition had not been filed by a legal representative of the former president. The prosecutor’s press office also clarified he was not among those being investigated regarding corruption at Petrobras.
Economic Concerns Add to Gloom
Prospects of an economic slowdown have spooked investors for some time now. Another development on Thursday added to these fears. The lower house of Brazil’s parliament gave its assent to a hike in government expenditure on retirement benefits. Markets have rallied 20% since April after declining from the beginning of the year on hopes that the government would demonstrate fiscal prudence and prevent a rating downgrade.
But the new amendment will add 9.2 billion reals ($3 billion) to government expenditure every year. Investors were disheartened because it comes at a time when the government is looking to increase taxes and cut expenditure. Additionally, the unemployment rate increased to 6.7% in May, the highest in five years.
Earlier on Thursday, the real had advanced after the director of the country’s central bank indicated that interest rates may be raised to control inflation. The country is the only G20 member which is raising interest rates to control inflation which is hurting both consumers and businesses.
5 Biggest Losers
Economic concerns have caused Brazil’s stocks to decline 8.4% from the highest point achieved this year. This is despite the benchmarks entering bull run in April, gaining 20% from its lower point this year. On Thursday, the benchmark declined 1.2%, the highest in both Americas. The real erased gains made on the central bank director’s comments and lost 0.9%. Brazil’s currency had lost 15% over the year at that point.
Among the day’s largest losers were Petrobras, Companhia Energética de Minas Gerais S.A. CIG, Companhia Siderurgica Nacional SID, Vale S.A. VALE, and GOL Linhas Aereas Inteligentes S.A. GOL. These stocks lost 5.2%, 4.4%, 3.9%, 3.8% and 3.2%, respectively.
In Conclusion
As amply demonstrated by this incident, Brazil’s stocks remain vulnerable going forward. The government’s efforts to shore up the economy will possibly determine the fate of markets going forward. If Rousseff’s administration succeeds in its efforts to shore up expenditure and control inflation, stocks may well return to their winning ways in the days ahead.
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