Brazil's real, stocks and bonds 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.
Trading on the Ibovespa briefly came to a halt, with state-owned companies from Petroleo Brasileiro SA to Banco do Brasil SA among the worst losses. The real posted its biggest slide since 2008 even after the central bank intervened to support the currency. The premium that investors demand to own the country's sovereign bonds rather than U.S. 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."
Brazil's political crisis deepened on Thursday as government allies began openly discussing scenarios for the replacement of Mr. Temer after federal police carried out search and arrest warrants throughout the capital, Brasilia. The operation came after O Globo newspaper reported on leaked testimony indicating that Mr. Temer approved payoffs to buy the silence of Eduardo Cunha, the mastermind behind last year's ouster of former president Dilma Rousseff. The allegations are the latest twist in a sprawling corruption scandal that has reached the top levels of the country's financial and political elite.
Mr. Temer denied the allegations Thursday afternoon, and said he would not resign. Brazilian Finance Minister Henrique Meirelles called foreign and local investors to try to calm markets, according to a government source briefed on the matter.
The political crisis pushed the CBOE Brazil ETF volatility index up as much as 63 per cent, heading for a record daily jump. The iShares MSCI Brazil capped exchange-traded fund plunged 16 per cent. The sell-off also drove up the yield on the country's €1-billion ($1.5-billion) of bonds due 2021 by the most since they began trading three years ago.
Brazil's currency futures plunged in early trading, triggering a circuit breaker. This year's carry-trade gains from going long the Brazilian real and short the U.S. dollar are nearing zero after reaching 8.7 per cent on Tuesday. A spike in one-month implied volatility also signals choppy trading ahead, making the trade less attractive.
The Ibovespa, Brazil's main stock index, ended the day down 8.7 per cent.
Brazilian assets had rallied for the past year as Mr. Temer pursued policies designed to pull the country out of recession and close a budget deficit.
With files from Reuters