Brazil Political Scandal takes toll on Stocks

The Bovespa index of Brazil declined by more than 10 percent after the open on May 18th. Stocks on the whole dropped by 8.8 percent after a scandal scathed Michel Temer, the recently installed president. The iShares MSCI Brazil Capped ETF closed 16.3 percent down after it fell about 18 percent. It was the ETF's worst day since October 2008.

Fear of reform failure

According to Gabriela Santos of JPMorgan Asset Management, Brazilian asset moves on May 18th mirrors a widely held concern among investors that reforms in Brazilian politics were not possible. Santos, Vice President of Global Market Strategy, went on to say that a number of foreign and local investors were in Brazil waiting for reform approvals. These investors were willing to take risks. No wonder many sold their positions. She continues to remain positive on emerging markets on better growth expectations.

If media reports are to be believed, Brazil's apex court opened an investigation into Temer's activities. The president hit back, declining to resign. He added that his innocence will be proved in the Supreme Court. On May 18th, the presidential office confirmed that in March, Temer had met the meat behemoth JBS SA's Joesley Batista, the chairman of the company. The office, however denied any wrongdoing when it came to keeping Eduardo Cunha, the former House Speaker who is currently incarcerated, from testifying. The newly elected president was sucked into a corruption scandal which had already entangled a number of his advisers and closest allies.

Stocks drop

A number of Brazilian stocks listed in the United States also plunged. Petrobras, the Brazilian Government run hydrocarbon giant, saw its stock drop about 15.4 percent. A dip of 13.4 percent was suffered by Banco Bradesco. Vale SA recovered from an earlier decline of about 8 percent to close nearly 0.8 percent in the black. Itau Unibanco stock dipped about 12.1 percent.

As of April 28, Brazil constitutes 7.43 percent of the MSCI Emerging Markets Index. China has the most, about 27.05 percent. The Merval stock index of Argentina closed about 2.95 percent lower. For this South American country, May 19th was one of its worst days in 2017. The country defaulted in its $1.3 billion debt in 2014. Brazil is its biggest trading partner. On May 18th, the Brazilian currency dropped about 7.5 percent against the US dollar.

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