Brazil funds abroad slide after Lula wins a fourth term
· BehindLines newsroom
The first market signals after Brazil's presidential runoff on Sunday, 25 October, point sharply lower. According to investingLive, drawing on Reuters, a Tokyo-listed fund that tracks the Bovespa index lost almost 15% during Monday's Asian session. In the United States, CNBC reported that the iShares MSCI Brazil fund (EWZ), the most widely followed exchange-traded fund on the country, fell by close to 20% in overnight dealing.
The moves follow the victory of incumbent President Luiz Inácio Lula da Silva, who secured a fourth term against Senator Flávio Bolsonaro with about 51.8% of valid votes. His opponent has refused to accept defeat and says he will ask for the vote to be annulled, adding political uncertainty to economic worries.
Why such a reaction? Some investors had bet on a change of government. CNBC explains that the Bolsonaro camp was seen as more inclined towards fiscal austerity and deregulation, two directions markets favour, while public debt and the budget deficit remain a concern in Brazil. Positions built up before the vote now have to be unwound, which explains the size of the declines.
These figures should be read with caution. The Japanese fund trades lightly, and investingLive describes its drop as a first indication on low volumes. The real test will come when the São Paulo exchange (B3) opens on Monday at 10am Brasília time (1pm GMT), and on the currency market, where the real is expected to come under pressure against the dollar. B3 rules provide for an automatic 30-minute halt if the Ibovespa falls 10% in a day.
What it changes, and for whom: savers and funds exposed to Brazil, in the Americas and in Asia, are facing an immediate paper loss. For Brazilian companies that borrow in dollars or import goods, a weaker real raises costs. For the government, the priority will be to reassure markets about its budget path, notably through its choice of economic team. The central bank could also come under scrutiny if the currency drops steeply. Monday evening's prices will show whether the slide seen abroad holds or eases.