Brazil markets set to rally after Congress backs impeachment

Brazilians in favor of the impeachment of President Dilma Rousseff react while watching the televised voting of the Lower House of Congress over her impeachment in Brasilia, Brazil April 17, 2016. REUTERS/Adriano Machado

By Bruno Federowski SAO PAULO (Reuters) - Brazil's financial markets are expected to react with euphoria on Monday after the lower house of Congress backed impeachment proceedings against President Dilma Rousseff, analysts and traders said. Brazil's stocks and currency have been among the world's best performing assets on bets that the leftist president's ouster would open the door to a more business-friendly administration, better equipped to lift the economy out of its worst recession since the 1930s. Hopes of political change have already helped lift the Bovespa benchmark stock index more than 20 percent this year to its highest level since mid-2015. In a sign the rally could continue, an exchange-traded fund of Brazilian equities gained 3.8 percent in Tokyo trading shortly after the result was announced. But traders' initial euphoria after Sunday`s Congressional vote could soon give way to caution as they look for hints of what policy would look like in a government led by Vice President Michel Temer. "Initially, details will be ignored and irrationality will prevail for one, two days," said Thiago Castellan Castro, a trader with Renascença brokerage in São Paulo. "After that, we'll go back to assessing technical issues - monetary policy, who'll be in charge of policymaking." Sunday's vote by 367 votes to 137 against - with 7 abstentions and 2 absences - was widely seen as the biggest hurdle to ousting the unpopular Rousseff. Temer would now take office if a majority of the Senate votes to open a trial against Rousseff in early May, as is expected. At that point the president would be suspended during the trial, which could last up to six months, and would be dismissed if found guilty. Many believe Temer would have an easier time implementing austerity measures after Rousseff's pledges of spending cuts and tax increases bumped into strong opposition from her own lawmakers following her tight reelection in 2014. Alexandre Póvoa, a partner with Canepa Asset Management, wrote in a client note the index could rise by an additional 10 percent. However, investors could book profits as early as May if it becomes clear that Temer does not hold a clear fix to Brazil's economy, he said. The real has strengthened more than 10 percent so far in 2016 despite determined action by the central bank to weaken the currency. Renascença's Castro said the currency could reach 3.40 per U.S. dollar on Monday after closing at 3.52 on Friday. Banco Fibra's head of treasury Cristiano Oliveira said the currency should stabilize at about 3.30 per U.S. dollar but could reach as far as 3.00 if it over shoots. ECONOMIC TEAM Once the dust settles, traders will scrutinize the nominations for Temer's economic team, analysts said. "Ideally, he would set up a team who is named for its technical credentials, not political reasons," said Leonardo Monoli, a partner with Jive Asset Management. Local media have named former central bank presidents Henrique Meirelles and Armínio Fraga, both known for sticking with orthodox policymaking at times of financial turbulence. Temer could also be eying Paulo Leme, the chairman of Goldman Sachs in Brazil, and Luiz Fernando Figueiredo, a former central bank official and founder of asset manager Mauá Capital, two people familiar with the situation told Reuters. Whatever the composition of Temer's possible government, it will likely face an uphill struggle given the embittered political climate, the depth of the economic crisis, and his PMDB party's involvement in a sweeping corruption investigation. "Strikes and protests by Rousseff's organized labor supporters will complicate things for VP Michel Temer when he assumes the presidency in mid-May, but the Lava Jato probe is still a much greater liability for him and the PMDB", political risk consultancy Eurasia Group wrote in a client note. (Additional reporting by Guillermo Parra-Bernal; Editing by Daniel Flynn and Jacqueline Wong)