Brazilian markets plunge as Wall Street, politics weigh

Brazil's stocks and currency closed lower on Friday against a backdrop of political setbacks for President Luiz Inacio Lula da Silva, expectations of higher domestic interest rates and a surging US dollar. Tracking losses on Wall Street, the Bovespa index of the Sao Paulo Stock Exchange closed down 0.95 percent at 23,887 points, chalking up losses of nearly 7 percent for the week. Brazil's currency, the real, weakened 0.24 percent to 2.474 to the dollar. "The principal thing is aversion to risk," said Tarcisio Rodrigues, head of currency operations at Banco Paulista. Traders said domestic turmoil was combining with uneasiness about the foreign outlook to unsettle markets.
On Thursday, the supreme court ruled that Central Bank President Henrique Meirelles could be investigated for alleged electoral crimes and tax evasion. On the same day it was asked to approve a probe into Social Security Minister Romero Juca's financial past. Both have denied wrongdoing.
The allegations have kept Juca from focusing on closing a rapidly expanding social security deficit that unnerves investors. Lula is also struggling to sew up his fractured coalition in Congress.
"The local market is more willing to buy (dollars) with this Meirelles story, questions about the US economy, interest rates, and with the stock market abroad having a bigger effect on the Brazilian market," Rodrigues said.
A potential interest rate increase next week by Brazil's central bank could help sustain the real, by boosting returns for investors. But the expected hike is pressuring stocks as it would make loans more expensive for consumers and companies.
Nine out of 20 economists polled by Reuters on Friday said the central bank will raise its key Selic rate by a quarter point to 19.75 percent a year on Wednesday to curb stubborn inflation. It would be the ninth increase since September.
The remaining economists expect the bank to hold the rate steady.
On the stock exchange, steel and mining shares led the decline, with stock for Usiminas finishing down 4.36 percent at 43.04 reais. Shares for Companhia Vale do Rio Doce ended down 1.8 percent at 54.50 reais.
Steel and mining stocks fell globally on worries about excess capacity in China.