Daily Management Review

Political Scandal Set To Crash Brazil Stocks, Hot Emerging Markets Trade Also To Be Dragged Down


05/18/2017




Political Scandal Set To Crash Brazil Stocks, Hot Emerging Markets Trade Also To Be Dragged Down
As a result of an emerging scandal involving the country's recently installed president, there has been a steep crash in the Brazilian stocks.
 
There was a more than 17 percent in the premarket Thursday closure in the value of the iShares MSCI Brazil Capped ETF (EWZ), a heavily-traded U.S. ETF that tracks Brazilian stocks.
 
An attempt to pay a potential witness to remain silent in the country's biggest-ever graft probe, was allegedly given his blessings by the Brazilian President Michel Temer, according to a report in Brazilian newspaper O Globo on late Wednesday. President Michel Temer has been in office for less than 10 months and the administration of the country is also similarly aged.
 
Temer's office on Wednesday denied any part in alleged efforts to keep jailed former House Speaker Eduardo Cunha from testifying but it also at the same time acknowledged that he had met in March with the businessman, Chairman Joesley Batista of meat giant JBS SA.
 
A corruption scandal has already entangled several of his closest allies and advisors and O Globo's report, which they say three sources familiar with the matter said was accurate, threatened to pull Temer into that corruption scandal.
 
"We believe the administration's economic team is highly concerned the crisis will impact their reform agenda," Larry McDonald wrote Thursday in "The Bear Traps Report" newsletter. "Equity prices / valuations are very dependent on completion / passage of these reforms."
 
After O Globo reported the news, there were  sharp drops in the premarket in the U.S.-listed shares of state-run Petrobras, Banco Bradesco, Vale SA, and Itau Unibanco.
 
There was a fall of more than 2 percent in premarket trade in the iShares MSCI Emerging Markets ETF (EEM).
 
The Brazilian Bovespa opens at 9 a.m., ET.
 
As investors cheered Temer's proposed economic policies and with the EWZ rising more than 45 percent in the period, Brazilian equities have surged over the past year. The fund is one of the 20 most actively-traded ETFs in the U.S. market on a daily basis, on average.
 
The page on Brazil's rocky political climate. Was supposed to be over turned by the new president and his promised reforms. Amid a massive corruption scandal and an economic crisis that crippled Latin America's largest country, President Dilma Rousseff was removed Aug. 31 and Temer became leader of the country after that removal.
 
"Now the fear is that Temer might have to leave office like his predecessor, Dilma Rousseff," said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. "But it's too early to panic because there are a lot of steps to removing a president in Brazil."
 
Buoyed by surging oil prices, just a few years before Rousseff's impeachment, Brazil had been an economic stalwart in the region. But millions of Brazilians were seen flooding the streets in protest of Rousseff's presidency due to the collapse in the crude market, coupled with a corruption scandal at Petrobras.
 
(Sourec:www.cnbc.com)  






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