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Brazil’s Market Carnage Stands Out in Week of Global Panic

Vinícius Andrade and Aline Oyamada
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Brazil’s Market Carnage Stands Out in Week of Global Panic

(Bloomberg) -- Amid all the carnage in global financial markets this week, almost no country has been hit harder than Brazil.

The real dropped 3.2% even as the central bank stepped in to limit losses, extending a drop that made it the worst performing currency in the world this year. The Ibovespa stock gauge tumbled about 5% to put its year-to-date loss at 14%, also among the worst runs for any market this year.

The rout that’s wiped out Brazilian securities has gained steam as investors turn increasingly pessimistic about the fallout from the coronavirus epidemic, but has been exacerbated by a show-stopping corporate drama and growing concern about the outlook for Latin America’s largest economy. It’s especially painful for investors who piled into stocks after the Ibovespa posted one of the world’s best stock rallies last year.

“It seems like a never-ending sell-off,” said Brendan McKenna, a currency strategist at Wells Fargo in New York. “The central bank needs to get more aggressive with its intervention. They haven’t stepped up as meaningfully as markets probably would like.”

The currency is off to its worst start to a year since 1999 even though central bank policy makers have sold $9.5 billion in foreign-exchange swaps in the past month in a bid to contain the volatility.

The plunge in the real is worsening the outlook for local airlines already prepared to take a hard hit from the global slowdown in travel due to the coronavirus. Gol Linhas Aereas Inteligentes SA and Azul SA have lost at least a third of their market caps this year.

Travel agency CVC Brasil Operadora e Agencia de Viagens SA -- which also disclosed it had found “accounting errors” in its earnings reports -- is down almost 50% this year.

And then there’s IRB Brasil Resseguros SA, which has lost about 60% of its value as it seeks to contain the fallout from false claims made by its executives about a Berkshire Hathaway Inc. investment. Though it accounts for less than 1% of the Ibovespa, the reinsurer is one of the top contributors to the index’s decline, according to data compiled by Bloomberg.

Disappointing economic figures and declining forecasts for expansion this year are also weighing on Brazilian assets -- especially the real, which is often used as hedge for long positions in stocks and rates. The central bank signaled on Tuesday it will likely cut borrowing costs in its March 18 meeting, resuming the easing cycle markets had thought was over. The statement put extra pressure on the currency and led traders to fully price in a quarter-point rate cut.

The Ibovespa fell 2.9% Friday as of 12:56 p.m. in Sao Paulo, on pace for a third week of losses. Swap rates rose across the curve, extending a strong steepening movement. Bond risk measured by five year credit-default swaps widened to 147 basis points, the highest since June 2019.

“It’s hard to see much rally until the virus spread turns,” said Ray Zucaro, the chief investment officer at RVX Asset Management in Miami.

(Updates figures in second paragraph)

--With assistance from Fernando Travaglini and Brendan Walsh.

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Julia Leite, Matthew Malinowski

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