Emerging Markets Are Slapped in Brazil Test

Brazil’s latest crisis serves as an important test for credit investors.

Debt buyers piled into emerging markets at an accelerating pace this year.

But now, are they willing to keep ignoring the fragility of some developing markets just to earn a little extra yield? Based on the initial reaction to the latest news out of Brazil late Wednesday, perhaps not.

Brazil’s markets plunged Thursday after reports that its president, Michel Temer, approved illegal payments to a disgraced lawmaker, raising questions about how long he can remain in office. The cost to insure against losses in the case of a Brazilian default surged.

The real plunged. The nation’s stock market tanked. And the biggest exchange-traded fund that focuses on emerging markets, iShares J.P. Morgan USD Emerging Markets Bond ETF, had its biggest one-day decline since December.

Emerging-market traders told Ye Xie of Bloomberg News that trading has all but evaporated in Brazil’s cash-bond market. Meanwhile, its assets have been a popular trade this year, with few investors making bearish bets on the nation, leading to an even more one-way crowd on the way out.

It shouldn’t be all that shocking that Brazil still has some fundamental political problems. Remember, it was only last year that Temer took over as president after the former leader, Dilma Rousseff, was booted from office. And don’t forget the corruption investigation into…