Brazilian markets and country-specific exchange traded funds plunged Thursday as some call for the resignation of President Michel Temer in response to reports of illegal payments to a disgraced lawmaker.
The iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) declined 12.8% Thursday.
The WisdomTree Brazilian Real Strategy ETF (NYSEArca: BZF), previously one of this year’s best performing currency ETFs, decreased 6.4% Thursday.
On the other hand, the ProShares UltraShort MSCI Brazil Capped ETF (NYSEArca: BZQ), which attempts to deliver two times inverse of the daily performance of the MSCI Brazil 25/50 Index, surged 25.0%.
Brazilian markets plummeted and briefly came to a halt, posting their largest drop since 2008.
“Markets will overreact, but the reality is that Brazil is rooting out the corruption that has plagued it for centuries,” James Gulbrandsen, a Rio de Janeiro-based portfolio manager at NCH Capital who holds Brazilian shares, told Bloomberg. “This significantly increases the likelihood of new elections within the coming months.”
Political risk deepened in Brazil as government allies considered a replacement of Temer after federal police carried out search and arrest warrants throughout the capital in response to O Globo reports on leaked testimony indicating that Temer approved payoffs to acquire the silence of Eduardo Cunha, the man behind last year’s ouster of former president Dilma Rousseff.
Brazilian assets are “going to be at heavy risk of further punishment as this news continues to develop, and it’s likely that investors will now develop a risk-off approach to the market,” Jameel Ahmad, the vice-president for market research at foreign exchange brokerage FXTM, told Bloomberg.
However, some are looking at this sudden sell-off as an opportunity to jump in. For instance, Ray Zucaro, the chief investment officer, said he going to be hunting for bargains.
“I am trying to do my homework to see what is cheap,” Zucaro told Bloomberg.
Traders who are betting on a quick turnaround could look to the two times leveraged ProShares Ultra MSCI Brazil (NYSEArca: UBR) or the three times leveraged Direxion Daily Brazil Bull 3x Shares (NYSEArca: BRZU).
For more information on the Brazilian markets, visit our Brazil category.