Brazil's currency tumbled and local stock futures slumped as investors bet that Luiz Inácio Lula da Silva's comeback win as president will compound fiscal worries for Latin America's biggest economy. The real dropped as much as 11.8 per cent to R$5.64 to the US dollar when trading opened on Monday, from R$4.98 on Friday, while futures linked to the benchmark stock index were down almost 15 per cent.
Lula won more than 51 per cent of the vote in Sunday's run-off, stunning investors who had positioned for a win by rightwing challenger Flávio Bolsonaro. Many polls had forecast a slight advantage for the opposition candidate. The real had gained about 4 per cent this month on hopes that Bolsonaro would tackle Brazil's large budget deficit and bring down double-digit interest rates. "The result wrongfooted a market that had increasingly priced a Bolsonaro victory," said Jim Reid, head of global macro at Deutsche Bank.
The yield on Brazil's euro-denominated bonds due in 2036 rose from 5.8 per cent to 6.1 per cent, while shares in Spain's Banco Santander, which has a large Brazilian unit, fell 3.8 per cent. The IMF projects Brazil's fiscal deficit will equal about 8 per cent of GDP this year. Public debt, at around 83 per cent of GDP, is high for an emerging economy, and the central bank has kept its policy rate at 13.75 per cent.
Lula made significant spending pledges on the campaign trail, including free weekend public transport, debt forgiveness for individuals and higher welfare payments. Investors have rushed to bet against the real, with CME Group reporting about $2.4bn in notional futures trades by early London trading, roughly three times the average daily volume this year. Analysts note that a congress with more rightwing seats could constrain his fiscal agenda, though Kurt Knowlson of Aviva Investors warned that currency weakness and higher rates may be needed to enforce discipline unless a credible fiscal path emerges quickly.
Source: Financial Times Markets · Summarized by HeadlinesBriefing