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UPDATE: Brazil's Markets Feel Pain of Domestic, Global Stress

By Tom Murphy

SAO PAULO--Brazilian financial markets on Thursday faced the pain of a long-awaited global asset adjustment in addition to its own vexing domestic problems, sending the currency plunging as interest rates surged higher.

Prospects for improvement in the U.S. economy aggravated market concerns about weak growth and high inflation in Latin America's largest nation. Those worries, plus uncertainty about government policy and massive demonstrations across the country against a variety of social concerns, mean Brazil is bearing the brunt of the global market's reaction to the reversal in U.S. easy-money policies.


"The party's over," said Marcelo Carvalho, chief economist for Latin America at Sao Paulo's BNP Paribas bank. "The U.S. Fed's monetary loosening will taper off. On the domestic side, we've hit the limit of industrial capacity, meaning there's more inflation ahead."

Wednesday, the U.S. Federal Reserve Board confirmed its policy of gradually unwinding monetary stimulus. The result is higher interest rates in the world's biggest economy, pulling investors back to U.S. assets and away from emerging market countries such as Brazil. Stocks plunged in Europe and on Wall Street while global commodities prices took a dive, factors that usually hurt Brazilian asset prices.

But Brazil is also suffering its own woes.

"Even amid rising interest rates worldwide, Brazil is seeing a bigger impact because of the internal imbalances that the economy presents," said Cristiano Oliveira, chief economist at Sao Paulo's Fibra bank.

Imbalances include an inflation rate of 6.5%, economic growth of no more than 2.5% in 2013 and a base interest rate likely to rise even higher than the already towering level of 8.0%.

The Brazilian real exited active trading at BRL2.2557 to the dollar, sharply weaker against the Wednesday close of BRL2.2143, according to Tullett Prebon via FactSet. On the BM&FBovespa exchange, the interest rate futures contract for January 2014 rose to 9.1% from 8.9% Wednesday.

Stocks plunged early in trading. The benchmark Ibovespa index was down nearly 2000 points, or about 4%, early in the session and remained in the trough for most of the day. But the Ibovespa index clawed its way back to daylight in the last hour of trading on a round of bargain-hunting by domestic funds. The Ibovespa index closed 0.67% higher at 48214 points. The back-and-forth pattern brought unusually high volume of BRL12.2 billion.

"Markets worldwide were feeling the stress today," said Joao Paulo Correa, foreign exchange manager at Brazil's Correparti brokerage. "In Brazil, we're getting it from both sides, global and domestic."

Brazil's government worked hard Thursday to contain some of the damage, with mixed success.

For the first time since the financial crisis year of 2008, the Brazilian National Treasury bought back its own bonds from the market in a frank effort to stabilize interest rates. The treasury bought back bonds with total face value of more than BRL4 billion. Interest rate futures contracts pulled back slightly from their highs in the wake of the purchases.

The central bank sold foreign exchange swap contracts, worth the equivalent of nearly $3 billion, early in trading and followed up with an auction of $3 billion in U.S. dollar credits with a government promise to buy back the dollars in September and October. The actions helped the real trim some, but not all, of its daily losses.

Looking forward, analysts seemed to agree on only one thing: Thursday may have seen a bit of an over-reaction.

"It was a huge panic," said Paulo Faria-Tavares, managing director of Sao Paulo's PTX Lending consultants. "As the market digests [U.S. Fed Chairman Ben] Bernanke's comments and the political situation in Brazil becomes clearer, we could see a different scenario."

Mr. Correa noted, "There was some good news, after all, from the Fed Wednesday. The U.S. economy is improving and it's the world's economic engine. China will grow. Europe will recover."

Such factors could help stabilize interest rates and boost stocks, especially as investors continue to seek out bargains following steep losses in recent weeks, analysts said. But the currency may face a tougher time.

"The bloodletting is not over," said Reginaldo Galhardo, foreign-exchange manager at Sao Paulo's Treviso brokerage. "It could weaken to BRL2.50 against the dollar, in the medium-term. That's the kind of demand for dollars we're seeing."

The underlying problem for the real, said Mr. Carvalho, is Brazil's burgeoning current account deficit, the sum total of U.S. dollar inflows and outflows except for investments. The 12-month current account deficit recently rose to $70 billion. It was $54 billion as recently as December.

"The current account deficit grew from 2% of GDP last year to 3% now," said Mr. Carvalho. "That's already worrisome and we're predicting a $100 billion deficit by next year."


--Paul Kiernan in Rio de Janeiro contributed to this article.

Source: The Wall Street Journal -

Last Updated on Monday, 17 March 2014 11:03


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