Brazilian Real: Election shock drives sharp repricing – Deutsche Bank

Deutsche Bank strategists highlight Brazil’s surprise election, with President Lula winning a fourth term after trailing in the first round. A Tokyo-listed ETF tracking Brazilian equities fell sharply, and the Real is indicated lower via derivatives. They stress that a rightward shift in Congress should constrain fiscal loosening, making Lula’s ability to establish a credible fiscal path crucial for Brazilian assets.

Lula win reshapes fiscal expectations

"In Brazil, President Lula pulled off a remarkable and genuinely market-moving comeback overnight, winning a record fourth term by 51.8% to 48.2% against Flávio Bolsonaro, despite having lost the first round 45.1%-47.0% three weeks ago."

"It is the first time since Brazil returned to direct presidential elections in 1989 that the first-round runner-up has gone on to win the runoff. The result wrong-footed a market that had increasingly priced a Bolsonaro victory."

"A Tokyo-listed ETF tracking Brazilian equities fell around -15% in Asian trading, with the real also tracking a -10% decline according to derivatives. Bolsonaro had been viewed as the more market-friendly candidate and, after right- and centre-right parties increased their Senate share from 47% to 63% in the first round, investors had been anticipating a better chance of fiscal consolidation."

"Lula, by contrast, has promised an adjustment without yet specifying how it will be delivered. The important medium-term point, however, is that the rightward shift in Congress remains even after Lula's victory, which should constrain the administration's ability to pursue a materially looser fiscal agenda."

"So once the immediate election premium and Bolsonaro's challenge to the result are digested, the bigger question for Brazilian assets will be whether Lula can use that congressional constraint to establish a credible fiscal path. That matters, especially with debt concerns already keeping rates high."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)