Brazil shares recover as Petrobras jumps; Mexican peso breaks losing streak

Brazil shares bucked a slump in emerging market peers on Tuesday as oil major Petrobras jumped following a bruising sell-off last session, while Mexico's peso rose half a percent to end a losing run.

The Bovespa stock index rose 0.7% after a near 5% slide on Monday - its worst session since April, as shares in Petroleo Brasileiro, as the company is officially known, recovered 7% from its 22% plunge which wiped out 71 billion reais ($13 billion) in market value.

Petrobras' board is set to meet on Tuesday to rule on Brazilian President Jair Bolsonaro's appointment of former Defense Minister Joaquim Silva e Luna to run the state run firm.

"Bolsonaro's decision to replace Petrobras' CEO is dashing hopes of Brazil's return to economic orthodoxy," said strategists at BCA Research. Analysts broadly note that the president is adopting populist policies instead of fiscal consolidation ahead of elections 20 months down the line.

"The central bank is likely to lift the policy rate in response... which would keep government borrowing costs above the nominal GDP growth rate," they said. "A violation of the fiscal spending rule would weigh further on the real amid higher inflation expectations, and bonds are likely to underperform as rates rise."

The real erased early gains to trade 0.3% lower, while dollar bonds and the cost to insure exposure to Brazil's sovereign debt steadied following dramatic falls on Monday.

Charts show that Brazil's weighting is declining in the main JPMorgan EM bonds index.

Mexico's peso rose for the first time in seven days against a stronger dollar. The peso lost 3.7% over the six days on concerns about factory activity as fuel supply from neighboring US state of Texas was impacted by a deep freeze there.

"The longer end of the Mexican fixed income market is seeing the sharpest selloff since the initial COVID shock in March 2020, dragging MXN lower with it," said Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities.

"For the current selloff to ebb it will require a top out in US real and nominal yields, as well as a return to more reasonable Mexican spread levels to US yields (5% or above on the 10yr)."

Eyes are on Federal Reserve chief Jerome Powell ahead of his mandated twice a year testimony in front of congress where he is expected to communicate that policy will remain loose as the economy recovers from a pandemic induced slump.

Stabilizing US Treasury yields ahead of the speech also aided risk assets, with Colombia's peso up despite declining oil prices.