U.S. markets open in 2 hours 39 minutes

Brazil’s Two-Circuit-Breaker Day is One for the History Books

Vinícius Andrade

(Bloomberg) -- Brazilian stocks tumbled almost 20% in the single worst trading day since the 1992 crisis that forced the nation’s first elected president from office following a brutal dictatorship.

Back-to-back circuit breakers were triggered when the Ibovespa slumped 10% just 20 minutes into trading and then again when it hit the 15% limit down by late morning. While the benchmark index recouped some of those losses, the gauge was still off 14% as of 3:43 p.m. local time.

To be sure, no one sat down at trading desks in Sao Paulo on Thursday expecting anything but bloodshed as markets the world over are roiled by coronavirus fears and an oil price war. Adding to the anxiety, the Brazilian government suffered a major blow in its austerity push Wednesday night. But even by many worst-case scenarios, the speed and severity of Brazil’s stock market collapse came as a shock. Year to date, the Ibovespa has lost half its value in dollar terms, making it the world’s worst performer.

“The government’s defeat in Congress was the final straw,” said Jose Tovar, chief executive officer at Rio de Janeiro-based asset manager Truxt Investimentos, which manages about 13 billion reais ($2.7 billion). “It’s hard to say how long this sell-off will last.”

The last time Brazil’s stock market fell this much intraday was in August 1992. Back then, the government and economy were in shambles. Fernando Collor de Mello, Brazil’s first directly elected president after the end of the military dictatorship, was fighting off accusations of corruption, and thousands of protesters were in the street demanding his removal. By the start of the next month, impeachment proceedings were underway.

The real weakened beyond 5 per dollar for the first time ever before backtracking and trading down 0.6% to 4.8468 per dollar. The central bank stepped up support for the currency by selling dollars in the spot market. Among emerging market currencies, the real is particularly vulnerable due to its lower carry appeal after interest rates fell to a record low.

It wasn’t supposed to be this way. The market was among the best in the world in 2019 and retail investors piled in amid optimism among investors that a reform agenda would be pushed through Congress under President Jair Bolsonaro. But the promised turnaround hasn’t really materialized as the government struggles to get the overhauls passed.

Brazil’s stock market is the biggest by far in Latin America, with oil producer Petrobras and commodity companies like miner Vale SA and meatpacker JBS SA among the biggest weightings. The country has the fifth largest weighting in the heavily-tracked MSCI Emerging Markets Index. The increased liquidity offered to companies in the MSCI is a blessing and a curse when global sentiment shifts suddenly.

Among the day’s biggest losers was airline Azul SA, which plunged as much as 34% after it scrapped its guidance, cut international capacity by up to 30% and preemptively put the brakes on domestic growth. Not a single stock in the 73-member Ibovespa index fell less than 5%.

Brazilian companies have been suspending their projections and more than two dozen share sales that were expected to price in the first half of the year may be delayed. Domestic stocks have seen a 46 billion-real foreign outflow this year through March 6, not including inflows from equity offerings, according to data compiled by Bloomberg.

The global sell-off gathered steam overnight after U.S. and European policy responses to the worsening spread of the coronavirus rattled investors pining for more. Aggressive steps taken by the Federal Reserve Thursday to flood the Treasury market with liquidity took some of the edge off.

Domestic political turmoil is also hurting sentiment. Bolsonaro’s austerity plans suffered a blow as lawmakers overturned a veto of an increase in payments from a welfare program, which could increase federal expenses by 217 billion ($45 billion) in 10 years. On top of that, one of Bolsonaro’s close aides tested positive for the virus on Thursday, leaving the presidential delegation that was in the U.S. earlier this week under observation.

The 5-per-dollar level is mainly psychological as the real has lacked reliable technical supports since late January, when it fell below the previous intraday record of 4.2765 per dollar. None of 44 firms surveyed by Bloomberg currently see the real ending the quarter weaker than 5 per dollar. The most bearish forecast is 4.75 per dollar.

--With assistance from Philip Sanders.

To contact the reporter on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net

To contact the editors responsible for this story: Carolina Wilson at cwilson166@bloomberg.net, Jessica Brice, Julia Leite

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2020 Bloomberg L.P.