‘Bolsomania’ has boosted the markets. Can it do the same for the economy?

Brazilian markets are in a strong upward trend this October after polls indicated a comfortable lead for far-right hopeful Jair Bolsonaro in the presidential race. The results of the first round vote on October 7th were followed by an additional boost to the domestic stock market and strengthened the Real against the U.S. Dollar.

But can these movements make an impact on other aspects of the economy, such as activity, income, or inflation?

The answer to this question is ambiguous. Yes, as some betterment may spill over to other segments of the economy. And no, because “real economy indicators” as they are known, do not vary in the same magnitude as financial assets.

Financial optimism

Ibovespa, Brazil’s main stock index, rose as much as 9.5 percent in the six trading sessions since October 1, when an Ibope poll showed the former Army captain had increased his vote intention. Not only that, but the data also showed that his main contender Fernando Haddad had stagnated among the electorate, while his rejection rates also increased.

Seen as more market-friendly than Lula’s pupil, Mr. Bolsonaro’s comfortable situation spread a wave of optimism in Brazil and overseas. The day after the election, when his large edge was confirmed, B3, the Brazilian stock exchange, recorded the highest volume of trade in a regular session ever: BRL 28.9 billion. As more international investors were attracted to the domestic stock market, the demand for Reais increased.

In the five sessions before the election, the depreciation of the U.S. Dollar against the Brazilian Real was the most significant weekly decrease of the currency in two and a half years. The trend persisted this week and the U.S. Dollar fell from its BRL 4.02 level on the first day of the month to BRL 3.72 on October 9, a 7.4 percent drop.