* Foreign investors worry as over 1 mln Brazilians protest
* Brazil seen more vulnerable to withdrawal of Fed stimulus
* Stocks fall 2 pct, real erases early losses after intervention
By Walter Brandimarte
RIO DE JANEIRO, June 21 (Reuters) - Brazilian financial markets extended their recent sell-off on Friday, with stocks and the currency flirting with four-year lows, as nationwide protests added to the sense of global uncertainty caused by a likely withdrawal of U.S. stimulus measures.
While the implications of local mass protests were unclear, analysts said they were an unforeseen consequence of an economic deterioration that has caused foreign investors to fall out of love with Latin America’s largest economy in the first place.
Investors have been fleeing risky markets since U.S. Federal Reserve Chairman Ben Bernanke on Wednesday said the bank’s stimulus program, which for years supported appetite for emerging-market assets, will probably be over by mid-2014.
In Brazil, however, the selloff has been “amplified” by protests that took more than 1 million people in over 100 cities to the streets, Barclays’ analyst Marcelo Salomon said in a research note, calling on the government to address the sources of the problems.
“Until this happens, even if global markets take a pause, we believe Brazil’s asset prices will continue to underperform those of its peers, especially those, like Mexico, that have been pushing ahead with structural reforms,” he said.
Brazil’s real weakened to as much as 2.2745 per dollar on Friday, adding to a 10 percent slump since the beginning of May. It later erased losses after the central bank intervened by selling traditional currency swaps, derivative contracts that provide investors with a hedge against further depreciation of the real.
The country’s benchmark Bovespa index lost as much as 2.4 percent, underperforming regional peers and adding to year-to-date losses of over 20 percent.
Shares of state-controlled oil giant Petrobras slid 1.8 percent on fears that a weaker real will increase the cost of its dollar-denominated debt and make it more expensive to import diesel and gasoline, which the company is forced to sell at subsidized prices in the domestic market.
Foreign investors have also been fleeing Brazil’s local bonds. A source in the government’s economic team said that the protests were contributing only “marginally” to that exodus.
In an attempt to stabilize the local debt market, the Brazilian Treasury has held extraordinary auctions this week to sell and buy back local bonds such as fixed-rate LTN and NTN-F notes and inflation-protected NTN-B notes.
It was the first time since 2008 that the Treasury resorted to such a debt management strategy.
While it was not clear whether demonstrations would keep growing to the point of resulting in economic disruption, analysts cautioned that a further slowdown of the Brazilian economy will likely fuel future protests.
They could complicate President Dilma Rousseff’s expected reelection bid next year, tarnish Brazil’s image abroad as the host of the World Cup, and provide a final blow to investors’ appetite for Brazilian assets.
“The unpredictability of the current situation stems from the fact that the current market volatility, which to us amounts to a major tightening of financial conditions, will almost certainly negatively impact both growth and inflation,” Tony Volpon, Nomura Securities’ head of emerging markets research in the Americas, wrote in a research note.
Brazil’s economy, said Volpon, faces substantial risk of very low growth in 2014, “perhaps even a recession.”