Former Peru President Pedro Castillo sentenced to 11.5 years in prison

A Peruvian court sentenced former President Pedro Castillo to 11 years, five months and 15 days in prison for attempting to dissolve Congress on Dec. 7, 2022, a move that led to his removal, arrest and charges of rebellion and conspiracy. The conviction, set against widespread protests, a government crackdown with at least 50 reported deaths, diplomatic fallout and the incarceration of multiple ex-presidents, materially elevates political and sovereign risk in Peru and could weigh on investor sentiment toward Peruvian assets and local markets.

Analysis

Market structure: Castillo’s sentencing increases near-term political fracturing in Peru and raises country risk premia. Expect Peru sovereign spreads and CDS to widen 50–150bps and USD/PEN to depreciate 3–8% over weeks if protests re‑escalate; Peruvian equity ETF (EPU) and local banks/retail names should underperform, while dollar‑exporters (minerals) see mixed effects — price support for copper if supply is disrupted.

Risk assessment: Tail risks include prolonged nationwide blockades that shut major mines for weeks (Peru ≈12% of global copper mine output) causing a 0.6–2.4% effective global copper supply shock and a >10% copper price move. Immediate (days) risks: FX, bond volatility; short term (weeks–months): production disruptions and rating actions; long term: higher sovereign yields and tighter permitting raising capex/opex for miners by 10–30%.

Trade implications: Priority trades are sovereign/FX hedges and event-driven miner hedges. Use Peru CDS or short local bonds to capture spread widening; short EPU via ETF puts for 1–3 months; hedge mining exposure with pair trades (long copper futures, short Peru‑exposed miners like SCCO/BVN) to isolate commodity upside from political risk. Size moves: 1–3% portfolio notional per trade, tighten stops at half the expected move (e.g., 2–4% FX).

Contrarian angle: Markets may overshoot political risk—if USD/PEN moves >6% or CDS >150bps then risk is likely priced in and selective buys in diversified global miners (SCCO) vs Peru‑centric BVN may work. Watch for rapid de‑escalation signals (court appeals, mobilization fatigue); unwind within 4–8 weeks if metrics revert 50% to mean.

Key Decisions for Investors

• Establish a 2–3% notional short position in EPU (iShares MSCI Peru ETF) via buying 3‑month 10% OTM puts to hedge country equity exposure; exit if USD/PEN moves back toward pre‑sentence levels or CDS compresses by 50bps within 4 weeks.
• Buy 1–2% notional sovereign protection: acquire 3–6 month Peru CDS or short Peru USD sovereign bonds (or use an EM sovereign CDS ETF if single‑name unavailable); target capture of a 50–150bps spread widening, cut if spreads compress by 50bps.
• Establish a copper‑risk pair: go 1% long COMEX copper futures and 1% short Southern Copper (SCCO) or Peru‑heavy Buenaventura (BVN) equity exposure for 3 months to isolate supply shock upside while hedging political exposure; rebalance if Peru production disruption exceeds 5% of annual output.
• Take a tactical FX position: long USD/PEN sized 1–2% of FX book (spot or 1‑month call options) targeting a 4% move; place stop‑loss at +8% adverse move and unwind if PEN recovers 50% of losses within 6 weeks.
• If market overshoots (USD/PEN >6% or CDS >150bps widen), opportunistically deploy 1–2% long positions in diversified global copper miners (SCCO) versus short BVN for 3–6 months, expecting a 10–20% relative mean reversion if political volatility subsides.