June 7, 2018 / 8:03 PM / 2 years ago

EMERGING MARKETS-Brazil stocks, currency tank as investor fears emerge

 (Updates to reflect new currency and equity values, adds
comments from former central banker)
    By Bruno Federowski and Patricia Duarte
    BRASILIA, June 7 (Reuters) - The Brazilian real on Thursday
plummeted to its weakest in more than two years as concerns over
Brazil's fiscal outlook and political future led to a widespread
sell-off despite intervention by the central bank.
    The currency tumbled as much as 3 percent to 3.9671
to the dollar, before paring losses somewhat, extending its fall
to nearly 19 percent since February.
    Meanwhile, Brazil's benchmark Bovespa equities index
fell some 6.5 percent at its low point, with not a single
constituent trading in the black for much of the afternoon.
    Rising U.S. bond yields have hit demand for emerging market
assets in general, but Brazilian markets have been particularly
affected after several opinion polls and a nationwide truckers'
strike against high diesel prices cast doubt on bets that the
winner of this year's elections will stick to a market-friendly
    Opinion polls have showed right-winger Jair Bolsonaro and
leftist Ciro Gomes as presidential frontrunners, while Geraldo
Alckmin and Joao Doria, relative centrists who would be welcomed
by investors, lagged.
    The sell-off drove the central bank to increase sales of
currency swaps, which function like sales of dollars for future
delivery, in a bid to cushion volatility. 
    But the central bank's options are otherwise limited,
analysts say, because of the government's unprecedented
unpopularity with Brazilians.
    "The hands of the Central Bank and the Treasury, for
political reasons, are tied," Gustavo Loyola, who headed
Brazil's central bank for two periods in the 1990s, told
    Despite the intervention, the real was the biggest loser
among Latin American currencies by a significant margin,
surpassing even the Mexican peso, which has been hard
hit by fears that the North American Free Trade Agreement
(NAFTA) negotiations may deteriorate.
    A Reuters poll showed the real is likely to strengthen in
coming months, but forecasts span an extremely wide range,
highlighting how the recent slump has heightened uncertainty
around the foreign exchange rate.
    Assurances by central bankers that the currency sell-off
will only drive monetary policy insofar as it affects inflation
and inflation expectations also seemed to have little effect on
markets, with yields on short-term interest rate futures
    "The central bank changed its plans and held rates at its
last meeting because of the foreign outlook and the currency, so
it's very reasonable that it could do so again for the same
reasons," a partner at a Rio de Janeiro-based asset manager
said, referring to the bank's unexpected decision to withhold
from cutting rates last month.
    Analysts told Reuters that the recent sell-off is unlikely
to contaminate long-term inflation expectations, but warned that
could change if the currency breached the 4.00-to-the-dollar
    Latin American stock indexes and currencies at 1843 GMT:
 Stock indexes                           daily %     YTD %
                             Latest       change    change
 MSCI Emerging Markets         1146.50     -0.32     -0.71
 MSCI LatAm                    2428.91      -3.5       -11
 Brazil Bovespa               73356.25     -3.63     -3.99
 Mexico IPC                   45398.40      0.48     -8.02
 Chile IPSA                    5464.71     -0.59     -1.80
 Chile IGPA                   27648.33     -0.54     -1.19
 Argentina MerVal             29796.37     -2.08     -0.90
 Colombia IGBC                12275.99     -0.17      7.96
 Venezuela IBC                39861.87      4.14   3055.78
 Currencies                              daily %     YTD %
                                          change    change
 Brazil real                    3.9042     -1.70    -15.13
 Mexico peso                   20.5210     -1.09     -4.01
 Chile peso                     631.95     -0.70     -2.74
 Colombia peso                    2846     -0.57      4.78
 Peru sol                        3.263     -0.06     -0.80
 Argentina peso                24.9825     -0.31    -25.55
 Argentina peso                   25.5      0.20    -24.59
 (Reporting by Bruno Federowski and Patricia Duarte; additional
reporting by Camila Moreira and Gram Slattery; editing by
Jonathan Oatis and Grant McCool)
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