Brazilian Assets Stay Vulnerable After Lula's Re-Election

what happened

According to Market Talk, Brazilian assets remain under pressure after heavy losses on Monday, when left-leaning President Luiz Inacio Lula da Silva was unexpectedly re-elected. The Ibovespa index closed 14% lower, while the dollar reached a 10-month high of 5.6055 reais, according to LSEG data.

MUFG Bank's Derek Halpenny expects further volatility over the coming days. He argues that a more right-leaning Congress could push Lula to compromise and tackle government waste, but that this will not become clear quickly, so investors are likely to assume the worst for now.

why it matters

For markets, the key question is whether the government can advance its policy agenda with the new Congress. Until more signals emerge, the real and Brazil's equity market are likely to stay sensitive to any news on fiscal policy.

market impact

Real and Ibovespa: post-election uncertainty is weighing on prices across Brazilian assets.

• ▼Brazilian real pressure down — investors price in the worst case after the election and expect volatility
• ▼Ibovespa pressure down — sell-off driven by uncertainty over economic policy
• ▼Gold pressure down — elevated US Treasury yields keep pressure on bullion

tags

instruments