July 4, 2019 / 2:33 PM / 17 days ago

UPDATE 2-Brazil markets rally, stocks hit new high as pension reform clears key hurdle

(Updates prices; adds comment and pension vote details)

By Jamie McGeever

BRASILIA, July 4 (Reuters) - Brazilian markets rallied on Thursday and stocks hit the highest level on record, as the government’s cornerstone pension reform bill cleared a key congressional hurdle.

The special pension reform committee in Congress passed the basic text by a vote of 36 to 13, and the reform bill could now be only two weeks from achieving full lower house approval. The bill aims to generate savings of around 1 trillion reais ($264 billion) over 10 years, the upper end of most analysts’ forecasts and at exactly the level long aimed for by Economy Minister Paulo Guedes.

Guedes welcomed the vote and said overhauling Brazil’s social security system could save as much as 3 trillion reais over 20 years. The president’s chief of staff, Onyx Lorenzoni, said the lower house vote could be held next week.

Financial markets held most of the gains they had built up ahead of the special committee vote. The Bovespa stock market closed up 1.5% at 103,582 points, after earlier hitting a record high of 104,021.60 points. The dollar closed 0.7% lower at 3.80 reais, after trading most of the day below 3.80 for the first time since mid-March.

“The 4th of July may be considered an important day – for Brazil,” said a senior trader in Sao Paulo, noting the historic market levels reached.

Interest rate futures fell across the curve, in many cases to new lows, as investors positioned for the central bank’s cutting its key Selic policy rate now that uncertainty surrounding pension reform appears to be lifting.

Speaking at an investor event in Sao Paulo alongside Guedes, central bank President Roberto Campos Neto repeated the bank’s view that concrete progress on the reform agenda is crucial to taming inflation, and that the rate outlook depends on economic activity and the balance of risks for inflation.

The pension reform bill, which can still be amended in the committee, is now ready for lower house plenary voting and approval before Congress breaks for recess on July 18. It will then go to the Senate.

“We believe that risks of additional dilution of the total fiscal savings in the Senate are very low,” Credit Suisse analysts wrote in a note to clients.

Thursday’s rally to historic highs for stocks and the currency caps a remarkable turnaround from earlier this year when pessimism surrounding pension reform, political infighting and economic gloom was at its deepest.

The dollar has fallen 8% since mid-March, driven in part by a dramatic fall in U.S. bond yields and interest rate expectations, while the Bovespa has risen 15% since mid-May.

But the economic picture remains cloudy, at best. Purchasing managers data on Wednesday suggested Brazil may have slipped back into recession, and Brazilian auto industry group Anfavea on Thursday slashed its 2019 vehicle export forecast to -28.5% from -6.2%. (Reporting by Jamie McGeever in Brasilia Additional reporting by Susan Mathew in Bengaluru Editing by Chizu Nomiyama and Leslie Adler)

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