Brazilian markets experienced record volatility on Monday following Sunday's presidential election, with interest-rate swaps plunging 90 basis points immediately. Vinícius Andrade and Felipe Saturnino reported that the limit was widened and loosened as investors priced in higher odds of a government change. Pradeep Kumar, portfolio manager at $1.5 trillion PGIM in Newark, called the moves unprecedented in two decades of trading.
Flávio Bolsonaro's stronger-than-expected performance against Luiz Inácio Lula da Silva triggered a surge in the ETF tracking Brazilian stocks (EWZ), which hit a record high. The fund is on track for its best week since 2020, gaining almost 12%, while the Ibovespa index posted its best weekly gain since January. The Brazilian real climbed over 3% and is headed for its strongest week since August 2024.
Strategists attribute the frenzy to appetite for country-specific trades amid global risks and investors holding excess cash on the sidelines. With a benchmark rate at 13.75%, Brazil offers some of the highest emerging market rates. However, traders warn of potential peril as Bolsonaro must secure a runoff victory by Oct. 25 without detailing fiscal overhaul plans.
Luis Estrada of RBC Capital Markets notes the market is eager to move past Brazil being "the country of the future," with risks including a Lula win or disappointment with Bolsonaro's proposals. During Lula's third term, debt as a share of GDP has risen roughly 10 points to 82.6%. A fiscal surplus of 2-3% of GDP is needed to stabilize the ratio, compared to a 0.6% deficit through August.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing