There is a Stock Exchange which is stronger than any scandal or risk of impeachment and which, since the belief of an imminent governmental change has spread, has begun a technically sustained rally, breaking a negative trend which had lasted for three years and which since he beginning of the year is confirmed with + 18%.
We have never seen a country like Brazil that has published its worst GDP data for 25 years but the stock market is strengthening day by day. Certainly the recovery of oil has given some breathing space to the state coffers but undoubtedly the Government of the "President" Roussef with a personal consensus dropped from 70% in 2014 to below 10% is now doomed.
Locked in a vicious circle and unable to make the reforms necessary to fill the macroeconomic imbalances of a country in recession and broken up by the maxi Petrobras scandal, now shipwrecked in the so-called "Lava Jato" investigation, which transversally affected state apparatuses, large corporates and the PT party, which now only has to stick to a radical and bankruptcy rhetoric.
Even the last bulwark of the Workers' Party: El Calamaro Lula da Silva, the symbol of the former worker who has landed in politics, falls to pieces after the police inspections at home and the proven corruption and scandal connivances.
Brazil is a country accustomed to scandals but this time it has reached a point of no return with the expected annulment of the 2014 elections and new presidential elections for the end of 2016. Whether it is impeachment or annulment of the vote, Roussef's road is marked and the markets celebrate with credit default swaps, which indicate the probability of bankruptcy falling from the highs above 500 bp to close to 400 bp in a couple of weeks.
The situation is heavy like a fallen angel Brazil has lost its investment grade and now has a BB "junk" rating with a negative outlook, the inexorable hourglass sees the timeline ticking by only 6 months of time to avoid a further fall into hell of unacceptable rates to re-enter the market.
The appreciation of the Brazilian Real is a good thing for inflation but also for investors looking for high-risk opportunities and therefore with attractive returns also linked to currency leverage. The flows for now favor shares and bonds maturing within three years, while at least partial coverage with the CDS is being used again for longer maturities.
With the Olympics approaching, if the change of government does not take place quickly and the current government were to remain in office for another 3 years, the risk of a turnaround or "repricing" of Brazilian investments is very high and the country would slip to a single B with a crash also of the short-term part of the yield curve and a shock of the currency.
In short, Brazil represents the typical example of how, in an era of low rates unexplored for most, the level of bets rises and the emerging markets return to that Far West which served as the soundtrack of the alternating fortunes of investors at the end of the years 90's. What Saudaji Carioca!
