Brazilian Markets Stabilize at Low Levels — Market Talk

What happened

Volatility in Brazilian markets eased after the surprise success of leftist President Lula da Silva's reelection bid. The iBovespa stock index falls 13% after falling as much as 17% early, and the Brazilian real weakens 8% against the dollar.

Confirmed

Global impact / market context

Markets had expected Lula's defeat by Flavio Bolsonaro, who promised to trim government spending. Lula may not spend as freely as before, and without fiscal consolidation, which means bringing government spending in line with revenue, interest rates are likely to stay elevated.

Analyst inference

The selloff shows investors repricing Brazilian assets after the election result. Higher interest rates would raise borrowing costs for companies and consumers, pressure stock valuations, and reduce cash available for capital spending, while making Brazilian assets less attractive to foreign investors.

Analyst inference

What to watch

1. The iBovespa fell 13% and the Brazilian real weakened 8% against the dollar, figures that show how sharply investors repriced Brazilian stocks and currency after the election result. Confirmed
2. Lula may not be able to spend as freely as in the previous four years, so watch whether his new government proposes spending cuts or fiscal consolidation, which means aligning government spending with revenue. Proposed
3. Morningstar DBRS's Michael Heydt says without fiscal consolidation interest rates are likely to remain elevated, so watch Brazilian interest rates for signs of sustained upward pressure on borrowing costs. Analyst inference

Evidence

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