AFP, Reuters/Rio de Janeiro
Brazilian financial markets plummeted on opening yesterday in the wake of a bombshell report that President Michel Temer approved paying hush money to a corrupt politician.
The real fell 5.46% against the dollar to 3.315, down from 3.134 at closing on Wednesday, CMA consultants said.
This reversed a steady strengthening that reflected gradual renewal of investor confidence in Latin America’s biggest economy after two years of recession.
The Sao Paulo stock market’s Bovespa index crashed more than 10%, triggering an automatic suspension of trading for 30 minutes.
Brazilian politics was in crisis after the report in O Globo newspaper that Temer discussed making payments to keep jailed former speaker of the lower house, Eduardo Cunha, from airing secrets about a massive corruption scheme.
Temer quickly denied the report.
Early Thursday he cancelled previously announced plans to meet with party leaders.
Meanwhile, US Treasury yields fell yesterday as investors worried that allegations against US President Donald Trump would divert lawmakers from tax cuts and fiscal spending that they had hoped would boost growth.
Yields on benchmark 10-year notes fell to one-month lows of 2.18% on strong buying overnight after Reuters reported that Michael Flynn and other advisers to Trump’s campaign were in contact with Russian officials and others with Kremlin ties in at least 18 calls and emails during the last seven months of the 2016 presidential race.
That came after the US Justice Department on Wednesday named former FBI chief Robert Mueller as special counsel to investigate alleged Russian interference in the election and possible collusion between the Trump campaign and Moscow. “The risk going forward is that this thing goes on and on and we don’t have a resolution, which means the new administration is not able to work on its tax initiatives and regulatory reform,” said Subadra Rajappa, head of US rates strategy at Societe Generale in New York.
The plunge in the Brazilian stock market on concerns about political instability also added to safety buying of US bonds.
“Brazil had been an improving fundamental situation, but which now has its own re-upped level of political risk at a time when the broad perception was that the country’s corruption problems were being addressed,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.
Benchmark 10-year notes were last down 1/32 in price to yield 2.26%, up from 2.22% late on Wednesday.
The yield curve between two-year notes and 10-year notes flattened to 95 basis points, its lowest since October 27 as investors reached for longer-duration bonds.
Longer-dated notes are viewed as having more potential upside than two-year bonds, which are highly sensitive to interest rate changes.
The Federal Reserve is expected to hike rates next month. “The two-year is going to be pegged to Fed expectations, so if there’s a flight to quality, you’re going to see that manifest in the back end of the curve,” Rajappa said.
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