Brazil credit: Re-pricing on political shock likely not over – Deutsche Bank

In view of analysts at Deutsche Bank, the latest political shock has triggered a significant re-pricing of Brazilian assets and they see further re-pricing in Brazil credit after the initial reaction as heightening political uncertainty weighs on growth, poses significant risks to fiscal reforms, and revitalizes the risk of credit ratings downgrade.

Key Quotes

“Thursday's price actions barely removed the richness of Brazil credit vs. its credit rating, and the risk of downgrade to BB- is not yet reflected, according to our analysis. In addition, heavy investor positioning will likely exacerbate the selloff. We therefore move Brazil to underweight in our sovereign recommendations. The main risk to our call is that the scenario of a quick resignation by Temer materializes, leading to some retracement of the widening.”