Brazil's real fell 12% against the U.S. dollar in early Monday spot trading after Luiz Inacio Lula da Silva won the presidential runoff. Citi expects a negative market reception, and analysts cited by Reuters expect a sharp selloff and cite fiscal risk.
Brazil’s real fell 12% against the U.S. dollar in spot trading early Monday, reaching 5.60 per dollar. The drop followed leftist President Luiz Inacio Lula da Silva’s victory over right-wing Senator Flavio Bolsonaro in a runoff election.
The vote recorded the lowest abstention rate since Brazil’s return to direct presidential elections in 1989.
Citi says the result ran against investor expectations
Citi said Lula’s runoff win should be received negatively by the market, as the result came against investor expectations. Shares of PBR dropped 23% in pre-market trading, reflecting investor concerns around fiscal policy, state-owned enterprises, and the broader reform agenda, according to Citi.
The bank’s pre-election investor survey had pointed to an asymmetric reaction, with market participants expecting larger downside under a Lula victory than upside under the alternative scenario.
Analysts expect a sharper selloff
Reuters reported that Lula’s victory looked set to trigger a sharp selloff in Brazil’s financial markets on Monday. Brazil’s stock market had hit a record high after the first round of the election earlier this month pointed to a Bolsonaro win.
According to Barclays analysts: "Lula’s victory should trigger disorderly moves in local markets". Barclays said USDBRL could initially go to the 5.50 range, and that Brazilian sovereign bonds could sell off around 300 basis points in the coming days.
Morgan Stanley said it would expect USD/BRL to test 5.50. If Lula’s new government does not commit to spending cuts in the coming weeks, the bank said it would likely see USD/BRL at 6.00.
JPMorgan analysts also cut their view on Brazil’s government bonds to "underweight".
Policy direction stays unclear
RBC BlueBay senior EM strategist Graham Stock said the outcome depends on how Lula and his team react. He added that a resolution might take months, because Lula will have to build a coalition to work with congress.
Sources: Investing.com, Investing.com (Reuters)
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