Brazil’s financial markets are bracing for a sharp selloff after Luiz Inácio Lula da Silva’s reelection, with investors unwinding weeks of bets placed on a change of government.
November futures for the Brazilian real were down 10% in Asian hours, according to Reuters, while a Tokyo-listed Brazilian stock fund, the Nomura NF Ibovespa Link ETF, plunged 15%. The moves came before markets in São Paulo had even opened for the week.
Bets built on a Bolsonaro win unwind
Markets had moved sharply in anticipation of a right-wing shift since Flávio Bolsonaro unexpectedly finished first in the October 4 first round. Stocks closed on Friday almost 7% above their level going into the first round, while the real was nearly 5% stronger against the US dollar, Reuters reported.
Interest-rate futures had also priced in expectations that tighter public finances under a new government would allow borrowing costs to decline. Lula’s victory reverses that logic in a single weekend.
A volatile week ahead
“We expect a sharp market reaction on Monday, with aggressive repricing, a selloff in assets and interest rate futures likely to hit their upper limit shortly after the open,” Luis Felipe Vital, head of macro strategy at Warren Investimentos, told Reuters.
Over the next four years, Lula must slow the growth of Brazil’s debt while protecting social programmes and investment. For investors, the question is whether his gradual approach to fixing public finances can bring borrowing costs down.
Without confidence that he can deliver, lenders could demand higher interest rates, adding to the government’s debt burden and making credit more expensive for businesses and households. The week’s trading will be the first verdict.
