Call that a political crisis? This is a crisis.
Brazil's currency, stocks and bonds have tumbled as a fresh political crisis ensnared President Michel Temer and threatened to derail an agenda designed to pull Latin America's largest economy out of its deepest recession on record.
Brazil's political crisis deepened as government allies began discussing scenarios for the replacement of Temer after federal police carried out search and arrest warrants throughout the capital. The operation came after O Globo newspaper reported on leaked testimony indicating that Temer approved payoffs to buy the silence of Eduardo Cunha, the mastermind behind last year's ouster of former president Dilma Rousseff.
The presidential press office vehemently denied the allegations. Very early this morning, Sydney time, Temer told reporters he had nothing to hide and would not be stepping down.
Trading on the Ibovespa exchange briefly came to a halt, with state-owned companies from Petroleo Brasileiro to Banco do Brasil among the worst losses. The real posted its biggest slide since 2008 even after the central bank intervened to support the currency. The premium investors demand to own the nation's sovereign bonds rather than US Treasuries jumped the most since June 2013.
"Markets will overreact, but the reality is that Brazil is rooting out the corruption that has plagued it for centuries," said James Gulbrandsen, a Rio de Janeiro-based portfolio manager at NCH Capital who holds Brazilian shares. "This significantly increases the likelihood of new elections within the coming months."
The iShares MSCI Brazil Capped exchange-traded fund plunged 16 per cent.
Brazil's currency futures plunged in early trading, triggering a circuit breaker. The real and Brazil's benchmark sharemarket index both slumped in the vicinity of 9 per cent.
Wall Street managed a modest recovery overnight from its biggest sell-off in more than eight months, helped by strong US economic data, but uncertainty over President Trump's agenda kept an index of global equity markets near a three-week low.
The US dollar reversed early losses against a basket of major currencies after stronger-than-expected American economic data put the focus back on a widely anticipated increase in interest rates by the Federal Reserve.
"We could be just shaking off the jitters here. Yesterday, investors were really worried," said Janna Sampson, co-chief investment officer at OakBrook Investments in Illinois.
Still, reports that Trump had tried to intervene in an investigation of alleged Russian meddling in last year's presidential election, and that his aides had numerous undisclosed contacts with Russian officials, kept markets concerned over his ability to implement his economic agenda.
Investors were likely relieved, Ms Sampson said, by Wednesday night's appointment of former FBI chief Robert Mueller to investigate alleged Russian interference in the election and possible collusion between Trump's campaign and Moscow.
"Whatever the (investigation) result, people feel they might have confidence it's an accurate, unbiased result," she said.
Earlier in the session, the Philadelphia Federal Reserve said its business activity index rose in May after declining for two months. Weekly unemployment data also pointed to strength in the labor market.
The Dow Jones rose 0.3 per cent, the S&P 500 gained 0.4 per cent, and the Nasdaq added 0.7 per cent.
Good morning and welcome to the Markets Live blog for Friday.
Your editors today are Myriam Robin and Patrick Commins.
This blog is not intended as investment advice.
Fairfax Media with wires.
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