BRASILIA (Reuters) - Brazilian markets fell sharply on Wednesday, as stocks closed 8.5% lower and the real slid back toward its all-time low against the dollar after the World Health Organization declared the coronavirus outbreak a global pandemic.
Reflecting the scale of investors’ risk aversion, longer term market-based interest rates surged, implying the central bank will eventually be forced to jack up interest rates to protect the currency and maintain capital inflows from abroad.
Stock market trading was suspended for 30 minutes in the afternoon after a 10% fall on the benchmark Bovespa index .BVSP triggered an automatic "circuit breaker".
The sell-off intensified after trading resumed, pushing the Bovespa down as much as 12% on the day to 81,000 points. The index settled down 8.5%, bringing its losses so far this year to 27%.
(GRAPHIC: Brazil stocks - here)
In dollar terms, the Bovespa is down 36% this year, making it by far the worst-performing major equity market in the world.
“Markets are in pain mode,” said a hedge fund manager in Sao Paulo. “The big stress today is in the rates futures curve.”
January 2027 rates futures surged 70 basis points DIJF27. Even shorter-dated contracts like January 2021 DIJF21, expiring when the benchmark Selic rate will likely be lower than on Wednesday, rose around 30 basis points.
The Brazilian real slumped as much as 2% to 4.7579 per dollar BRBY, within sight of the recent record low of 4.7975 per dollar. One-month implied volatility on the dollar/real exchange rate rose to 19.7%, the highest since October, 2018 BRL1MO=.
(GRAPHIC: Brazil real volatility - here)
In local news, Brazil’s government lowered its 2020 economic growth forecast to 2.1%, and major global banks Barclays, UBS and Bank of America Merrill Lynch reduced theirs far lower.
Even after these aggressive revisions, analysts said the risks remain to the downside for Brazilian growth and asset prices.
“We return from our trip to Brazil more cautious than before,” Barclays analysts wrote in a note on Wednesday, noting a “rarefied” political environment, lack of progress on reforms, subdued growth, and challenges facing the central bank amid extensive currency weakness.
All of that makes for a “testing environment for FX and local rates in coming months. The market narratives that could
have supported the currency – an improvement in cyclical growth, a clear path and leadership for reforms, and a pause in the easing cycle – appear to have vanished or become less likely.”
Reporting by Carolina Mandl and Jamie McGeever; Editing by Sonya Hepinstall and Tom Brown