Iron ore slumped to a new five-year low overnight as China's finance minster said not to expect anything major from Beijing to counter a recent string of weak economic data.
“The Chinese government is signaling it won’t be very aggressive in stimulating growth, and that’s scaring investors,” says a hedge funder in Rio, though it'll be upcoming elections as the main driver for the Bovespa.
The ASX (NYSEARCA:EWA) fell 1.3% in Sydney, and the aussie (NYSEARCA:FXA) is off 0.7% to $0.8865. Brazil's Bovespa is lower by 2.2%, led by Vale (VALE -4.2%).
Brazil's money laundering probe linked to state-run Petrobras (PBR -1.2%) is spreading to financial institutions as prosecutors investigate whether they met compliance requirements.
Court documents cite units of banks including Citigroup (NYSE:C), Banco Santander (NYSE:SAN) and HSBC, as well as Brazil-based Itau Unibanco (NYSE:ITUB) and Banco Bradesco (NYSE:BBD) as holding accounts or executing operations linked to the alleged laundering of 10B reais.
The refining division at Petrobras already is under investigation for runaway spending including alleged inflated contracts to suppliers, and is cited as one of the possible sources of cash being laundered in the case dubbed “Car Wash” by police.
The Bovespa has its tail in the air to the tune of 2.6% after another dip in support for President Dilma Rousseff to 34% from 37%.
Opposition candidates, however, also saw their support drop, bringing the number of voters without a preferred candidate to its highest pre-election percentage in 25 years. Still, the opposition combined is now polling higher than the president
With the Nasdaq and Russell 2000 each off 2% and the S&P 500 down 0.6%, what's working today? Emerging markets (EEM +0.7%), particularly Latin America (ILF +2.2%), particularly Brazil, where the weight of a year-long rate hike cycle looks to be coming to a close just as monetary tightening gets underway in the States.
Up 2.6% today, the iShares MSCI Brazil Index (EWZ) is ahead more than 20% since the start of February.
Absent reforms, another financial crisis is likely to leave taxpayers on the hook for hundreds of billions, warns the IMF, estimating the world's biggest banks receive up to $590B in implicit public subsidies because of their TBTF status.
Said subsidies include bankers who still have a "heads I win, tails you lose" attitude, and investors who lend at lower cost to banks than they might otherwise. The IMF calculated the size of the subsidies by comparing the CDS prices and credit ratings across larger and smaller banks. While the amount has fallen since the crisis, it still remains sizable. "All in all ... the expected probability that systemically important banks will be bailed out remains high in all regions."
Subsidies for the biggest players are "like insurance for which banks don't need to pay a premium," says senior IMF analyst Gaston Gelos.
Citigroup's (C +2.4%) Brazilian unit is among the bank's facing the most sizable losses should companies controlled by Elke Batista default, according to Moody's. The unit's loans to those firms total $91M, or 42% of the profit generated by that arm last year. Brazilian banks Itau Unibanco (ITUB +2.4%) and Banco Bradesco (BBD +1.8%) have mangeable exposure, says Moody's.
After weeks of mass protests, Brazilian President Rousseff calls for a referendum and Constituent Assembly to carry out political reform in the country. Off more than 20% this year, the Bovespa is the worst performer among major emerging markets. The carnage in Brazilian ADRs includes BBD, CZZ, FBR, GFA, ITUB, OIBR, PBR, VALE. Brazilian ETFs EWZ and BRF have fared little better.
Bacon Bradesco (BBD) drops out of the bidding for Citigroup's (C) Brazilian consumer finance unit, according to a local newspaper, after getting no reply on its $1.49B offer. With Banco Santander (SAN) not yet indicating any interest, it could leave just Itau Unibanco (ITUB) as the lone potential buyer.
Performance in Brazil is a negative in an otherwise positive earnings report from HSBC as the bank - specifically citing Brazil - said loan impairment charges in Latin America in Q3 jumped 25%. The country's banking sector has lost 10% of its value this year thanks to slowing growth no longer being able to mask a rise in non-performing loans.
Fans of Brazil's Banco Bradesco (BBD) can take comfort or run for the hills as 18 out of 24 analysts surveyed have a buy rating on the lender, the highest for any stock on the Bovespa. Most are banking on a re-acceleration of the struggling economy as 500 basis points of central bank rate cuts work their way through. Similarly valued and rated is the country's largest lender, Itau Unibanco (ITUB).
Banco Santander's (STD) Brazilian unit President Marcial Portela denies reports the bank is planning to sell an equity stake to one of its competitors. "(Santander) does not need capital," says Portela. Brazilian banks mentioned as buyers are also denying reports of talks. (earlier)
With mounting losses in its home market, Spain's Banco Santander (STD) is under political pressure to unload at least a portion of its profitable Brazilian unit. Likely bidders might be Banco do Brasil (BDORY.PK) or Bradesco (BBD). Shares of Santander's Brazilian unit have been on the rise this year in anticipation of the sale.
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