Investors are expecting sharp swings in Brazilian markets after Sunday’s elections no matter the outcome, with assets to adjust quickly as the neck-and-neck presidential race prevented traders from taking too strong a view. A lead of more than four percentage points for President Luiz Inácio Lula da Silva in the first-round vote could weigh on equities, steepen the swap rates curve, and potentially put pressure on the real, according to Mauricio Moura, co-founder of Zaftra.
A smaller gap would be seen as relatively more favorable for Flávio Bolsonaro, potentially sparking a rally. “Orthodox fiscal policy U-turns are handsomely rewarded by the market,” said Natalia Gurushina, chief economist at Van Eck Associates Corporation. Eduardo Cohn, portfolio manager at Heritage Capital Partners, built “marginal” positions that would benefit from a Bolsonaro win, liking long-dated NTN-Bs.
JPMorgan has estimated that a fiscal-improvement scenario could send the real about 6% higher, push local government bond yields toward 13% and lift equities as much as 50%. Under fiscal deterioration, it sees the real weakening about 6%, bond yields rising toward 15.5% and equities falling 21%. Bloomberg Economics projects a Bolsonaro win could lower 10-year yields by 70 basis points and strengthen the currency by almost 3%.
Traders will turn to Japan’s Next Funds Ibovespa Linked ET F, currency derivatives at the CME, and ET Fs in Frankfurt and London. In a Bolsonaro win, Citigroup Inc. favors homebuilder Cyrela SA and apparel retailer C&A Modas SA. In a Lula win, Citi strategists favor stocks with pricing power such as Embraer SA, WEG SA and Axia Energia SA.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing