Brazilian markets waits for signals from both Lula and Bolsonaro

Ahead of Brazil’s general election on Sunday, analysts from main banks, brokerages, and asset managers had indicated that they would not welcome any big surprises on Election Day. 

Yet President Jair Bolsonaro’s stronger-than-expected showing against former President Luiz Inácio Lula da Silva, resulting in a runoff which will be held on October 30, has boosted the main indicators in the domestic financial markets on Monday. 

The benchmark stock index Ibovespa rose more than 4 percent upon opening on Monday morning. At the same time, the U.S. dollar had fallen more than 3.7 percent by 11 am.

This behavior is apparently not tied to the global scenario (not yet, at least), with global stock markets retreating and New York stock futures operating on the sidelines amid concerns that more aggressive monetary policies around the world could trigger a global recession.

Improved forecasts for growth and inflation in Brazil are also helping. Private sector analysts surveyed weekly by the Central Bank for its Focus Report have revised GDP projections for this year up to 2.7 percent and inflation forecasts down to 5.74 percent by year’s end. The benchmark interest rate is expected to remain at 13.75 percent.

“Congress is dominated by the Big Center [a federation of ideologically fluid parties which has become the leading political force in Brasília]; whoever is elected will have to sit and negotiate with Arthur Lira [the House speaker],” says Luciano Sobral, chief economist at investment firm Neo Investimentos.

Other analysts believe that Lula’s victory in the first round could strengthen him, which could lead the former president to make fewer concessions to the market. 

“If the Lula campaign believes it needs to give specific proposal points to win the election, it will,” said Mario Sergio Lima, a senior analyst at Medley Advisors, during The Brazilian Report‘s 2022 live broadcast on Sunday. “But the question is: does he need to do that? So far, Lula hasn’t.”

What the investment and business sectors now expect is a clearer nod from Lula to the center and, above all, economic guidelines that seek fiscal balance. Appointing more names such as former central banker Henrique Meirelles as finance minister, for example, would be a good sign — the ultimate token of commitment to austerity.

They also expect Mr. Bolsonaro to demonstrate his appetite for privatization and plans to curb public spending despite expensive election promises such as keeping the Auxílio Brasil cash transfer program at BRL 600 a month.

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