Brazilian stocks were set to crash on an emerging scandal involving the country’s recently installed president.

The iShares MSCI Brazil Capped ETF (EWZ), a heavily-traded U.S. ETF that tracks Brazilian stocks, crashed more than 17 percent in the premarket Thursday

Less than 10 months into the new administration, Brazilian newspaper O Globo reported late Wednesday that Brazilian President Michel Temer gave his blessing to an attempt to pay a potential witness to remain silent in the country’s biggest-ever graft probe.

EWZ 5-day performance (extended hours)

Source: FactSet

Temer’s office on Wednesday acknowledged he had met in March with the businessman, Chairman Joesley Batista of meat giant JBS SA, but denied any part in alleged efforts to keep jailed former House Speaker Eduardo Cunha from testifying.

O Globo’s report, which they say three sources familiar with the matter said was accurate, threatened to pull Temer into a corruption scandal that has already entangled several of his closest allies and advisors.

“We believe the administration’s economic team is highly concerned the crisis will impact their reform agenda,” Larry McDonald wrote Thursday in “The Bear Traps Report” newsletter. “Equity prices / valuations are very dependent on completion / passage of these reforms.”

U.S.-listed shares of state-run Petrobras, Banco Bradesco, Vale SA, and Itau Unibanco also saw sharp drops in the premarket after O Globo reported the news.

The iShares MSCI Emerging Markets ETF (EEM) fell more than 2 percent in premarket trade.

The Brazilian Bovespa opens at 9 a.m., ET.

Brazilian equities have surged over the past year, with the EWZ rising more than 45 percent in the period, as investors cheered Temer’s proposed economic policies. The fund is one of the 20 most actively-traded ETFs in the U.S. market on a daily basis, on average.

The new president and his promised reforms were supposed to turn the page on Brazil’s rocky political climate. Temer became leader of the country after President Dilma Rousseff was removed Aug. 31 amid a massive corruption scandal and an economic crisis that crippled Latin America’s largest country.

“Now the fear is that Temer might have to leave office like his predecessor, Dilma Rousseff,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. “But it’s too early to panic because there are a lot of steps to removing a president in Brazil.”

Brazil had been an economic stalwart in the region just a few years before Rousseff’s impeachment, buoyed by surging oil prices. But the collapse in the crude market, coupled with a corruption scandal at Petrobras, led to millions of Brazilians flooding the streets in protest of Rousseff’s presidency.

—Reuters contributed to this report.



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