Brazil’s financial markets sold off sharply in the immediate aftermath of the latest corruption allegations against President Temer, with equities, the currency and bonds all coming under pressure. Markets have since stabilised, but one notable consequence of the latest political drama has been that the local currency government bond yield curve has shifted up and steepened. This suggests that the primary concern for investors is that fiscal reforms will either be diluted or shelved, rather than that the central bank will be forced to abandon its easing cycle. Indeed, as things stand, we still expect Copom to lower interest rates at its meeting next week.
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