07 May 2020 by jbchevrel
Brazil 5y CDS started COVID crisis at 93bp (2/21) and peaked at 375bp on March 18, the week of the CDS roll. It then ranged between 215bp-365bp and ends this week at 335bp. The last bout of idiosyncratic underperformance was caused by political developments in Brazil. First of all, President Bolsonaro’s handling of the COVID crisis. “So what? Sorry. What do you want me to do about it? … I can’t work miracles.” he said on April 28 as # dead in Brazil broke above 5,000. Bolsonaro downplayed the gravity of the pandemic. He refused public-health guidance even as Brazil’s hospitals were overwhelmed. He refused to embrace social distancing, even for himself. This is providing a case study, as no other leader took his stance. As of May 6, the Health Ministry reported almost 116,000 cases and 7,958 deaths. Beyond that, the political situation has worsened as Bolsonaro’s relationship with Congress deteriorated and he is in a battle with the Supreme Court and under criminal investigation. On Apr 16, Bolsonaro fired his Health minister. On Apr 24 his Justice minister (most popular politician in Brazil) resigned and accused Bolsonaro of trying to replace the head of the federal police with someone more sympathetic to him. Bolsonaro denied but risk premium increased. On Apr 27, the Supreme Court allowed federal prosecutors to open an investigation on Bolsonaro. On Apr 29, the court blocked Bolsonaro from nominating a close ally as the new federal police chief. This week, Fitch revised Brazil's outlook to Negative due to deterioration / uncertainty on the fiscal risk in Brazil. That was on Wednesday, before Copom decision in the evening. Swaps were pricing -62bp cut and the consensus of economists was centered on -50bp. The Copom finally cut by -75bp, Selic now 3%. The other surprise was that the Copom left the door open for more. The statement indicated a final cut at June Copom meeting. That is now expected to be at least -50bp but possible -75bp again, “no bigger than a 75bp cut” according to the BCB statement. This would leave Selic rate at either 2.25% or 2.5% at the end of this easing cycle. The COVID deflationary impact in the short term seems to be giving comfort to the BCB that easing policy aggressively is the right thing to do. If the deflationary impact of COVID remains the dominant force, the BCB will have the luxury to keep Selic at 2.25% or 2.5% after June, but political and fiscal clouds are still there.