Some investors bet Brazil has further room to fall

Fri May 26, 2017 1:37pm EDT
 
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By Dion Rabouin and Trevor Hunnicutt

NEW YORK (Reuters) - Some investors are betting the worst is yet to come for Brazil's stock market, even after a brutal selloff last week.

Fund managers said troubles for Brazilian President Michel Temer, who was caught on tape discussing a hush-money arrangement to buy the silence of imprisoned former house speaker Eduardo Cunha, are likely just beginning, and could derail efforts to reform Brazil's pension system, moves aimed at cutting public debt and boosting economic growth.

Brazil's benchmark Bovespa stock index tumbled nearly 9 percent on May 18 after news of the tape surfaced, notching its biggest one-day drop since the depths of the financial crisis in October 2008.

Short sellers descended on funds containing Brazilian shares on the belief they have further to fall.

About 12 percent of shares of the $5.6 billion U.S.-listed iShares MSCI Brazil Capped ETF are being shorted, according to S3 Partners, a financial analytics firm. The fund ranks as the second most-shorted country ETF in the United States by dollar value of short interest.

Investors who take short positions sell borrowed stock they hope to buy back later at lower prices to reimburse the lenders, pocketing the difference.

The Brazil ETF pulled in $526 million of new money in the week ended on Wednesday, according to Thomson Reuters' Lipper research unit, but those figures include shares created so they could be sold short.

"As EWZ's stock price dropped, short sellers needed to short more stock in order to keep their risk positions at the same levels," said S3 Partners managing director of research Ihor Dusaniwsky.   Continued...

 
A demonstrator shows a picture of President Michel Temer near a burning barricade during a protest against Temer and the latest corruption scandal to hit the country, in Brasilia, Brazil, May 24, 2017. Picture taken May 24, 2017. The sign reads: "Out Temer!." REUTERS/Ueslei Marcelino