Brazil’s Black Swan In Context: Another “Since The Crisis” Moment

The President appeals to Supreme Court to suspend investigation on him.

No, that’s not breaking news on the Trump administration’s ties to the Kremlin.

Rather, it comes from Brazil where Michel Temer is attempting to plug holes in a quickly sinking ship. You’ll recall that last week, a new corruption scandal erupted in the country, promptly sending the real tumbling and triggering circuit-breaker-tripping madness in Brazilian equities.

As we noted the next day, that rather unpleasant turn of events led directly to a case study in why you probably shouldn’t own triple-levered ETFs. Specifically, the Direxion Daily Brazil Bull 3x Shares ETF, ticker “BRZU,” crashed a truly impressive 48% on the day which, as you can see from the following chart, was “anomalous” to say the least:

Well for those wondering just how bad the FX carnage was historically speaking, have a look at this chart from Citi:

That red band is the 2-standard deviation band.

Yeah. Black swan-ish.

Of course there’s some significant spillover risk here for EM as a whole, so this is a situation you’ll probably want to watch fairly closely as much as it pains you to follow Latin American politics.

To help, here’s Bloomberg’s summary of the latest developments:

President Temer defiant as pressures mount, both in speech on Saturday and on interview w/ Folha, Estado column. Temer appeals to Supreme Court to suspend investigation on him and Court’s decision — expected for Wednesday — could be key in determining Temer’s remaining political support, local media says.