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*BRAZIL GOVT ALLIES SAID TO SEEK TEMER RESIGNATION: GLOBO
*TEMER UNLIKELY TO FINISH HIS TERM IF ALLEGATIONS TRUE
*TEMER LOST CONDITIONS TO NEGOTIATE PENSION REFORM
*BRAZIL ’21 EUROBONDS SLUMP MOST ON RECORD AMID POLITICAL CRISIS

 

We spoke to our analysts in Washington overnight – we’re in contact with our relationships on the ground in Brazil.  Setting up client calls today:

Brazil Erupts as Tapes Could Ruin Temer Presidency

In Cooperation with Analysts at ACG Analytics

Globo news, an internationally respected Brazilian network and news franchise, is reporting that the Chairman of JBS, the world’s largest meat company, has taped weeks of conversations with President Temer involving pay-offs to prevent imprisoned house speaker Eduardo Cunha from testifying in the Operation Car Wash scandal.

Brazilian equities have surged over the past year as Temer’s administration forged on an ambitious reform program that cheered investors. Brazilians, however, are overwhelmingly opposed to his austerity measures and the president’s approval rating hovers at around 11%.

Equities in Brazil

Up 132% from the January 2016 bottom, stocks in Brazil have priced in a ton of political goodwill.  The EWZ is set to open at the $34.20 – $34.50 level, below the two year trend line above in red.

We believe the administration’s economic team is highly concerned the crisis will impact their reform agenda. The government has been positioning their long awaited, and very controversial pension reform proposal to the lower house of Congress.  Equity prices / valuations are very dependent on completion / passage of these reforms.

Credit Risk Rising

In our view, credit risk will surge focused on Brazil’s government bonds if the reforms collapse.

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The JBS CEO Josely Batista reportedly taped Termer ordering the executive to “keep up” the payments in one of the recordings, which are said to be damning throughout.

Several weeks of recordings have reportedly been delivered to the
Attorney General’s office while opposition lawmakers are calling for the president to resign immediately.  If this occurs, the Brazilian Constitution requires that elections be held within ninety days.

Dollar – Real Heading North

Technically, the real is moving to far weaker ground – a print above 3.21 shifts the currency into a new bear market.

Per our friends at ACG Analytics, if Temer resigns or otherwise leaves office the Brazilian Constitution requires elections within ninety days.  Brazil had been emergencing from it’s worst recession and consensus had been slowly but appreciably growing for Temer’s market based economic reform agenda.

From ACG Analytics in Washington

The corruption crisis in Brazil has left scorched earth where there
were political parties.  Initial thoughts include increased attention toward Mariana Silva, a candidate of the left who surged in the 2014 elections but ultimately missed the second round vote.  If she is not tainted by scandal, her stock certainly goes up.  Brazil’s small but vocal hard right will receive attention as its calls for “cleansing” Brazilian politics through the instatement of military rule could resonate in some quarters.

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