Brazil Markets Plunge: Traders Sell First, Ask Questions Later

A financial storm affects Brazil beginning with the dramatic collapse of the currency. The entire landscape of Brazil’s financial market is under siege as investors grow increasingly doubtful about the government’s ability to manage the growing fiscal crisis. 

The selloff which is responsible for sending the real plunging to unprecedented lows is sweeping through several sectors and is affecting everything from equities to local-currency bonds and dollar-dominated securities. 

Traders are pursuing to protect hedges against a potential sovereign default and analysts suggest that the extraordinary measures taken by the central bank on Tuesday to stop the currency’s decline is just a stopgap solution. They further warn that the lawmakers are attempting to dilute a major austerity plan and will likely aggravate the chaos. 

This growing turmoil reflects a growing scepticism among investors regarding President Luiz Inacio Lula da Silva’s commitment to addressing the rising fiscal deficit. Brazil is dealing with an annual budget shortfall of 10% which is significantly larger than those that were experienced during the previous term of Lula. 

Compounding the situation, his recent emergency brain surgery has come to a specific inopportune moment that further complicates efforts to stabilise public finances. 

In a move that further unsettled investors, the lower house of Brazil made changes to Lula’s spending proposal late Tuesday. Though the plan was approved and is pending a Senate vote, lawmakers have removed a provision allowing governments to limit the use of tax credits by companies if financial conditions deteriorate. 

A money manager at Vontobel Asset Management, Sergey Goncharov made a remark, “Brazil has turned into a market where the mantra is ‘sell first, ask questions later. The combination of fiscal worries and the central bank’s response to the currency situation has sparked a wave of panic selling.”

Over the past four sessions, the Real has emerged as the worst-performing currency globally contributing to a staggering 21% decline against Dollar this year.

Kathleen Kirkwood

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