Real stands out as Brazil’s election race stays tight

Renewed expectations of a change in government after Brazil’s October presidential election boosted risk appetite in local markets, helping some assets outperform emerging-market peers. The real was among the five strongest currencies tracked by Valor on Monday (21).

In fixed income, expectations of an opposition victory also drove a decline in risk premiums across most of the interest-rate curve, with the exception of the very short end. The local risk-on mood received further support from global markets, as oil prices fell for a fourth straight session and government bond yields declined broadly across developed economies.

The stronger appetite for risk also lifted the benchmark Ibovespa stock index back above 186,000 points. Gains were held back by declines in mining company Vale and oil giant Petrobras shares.

The move came alongside a surge in major U.S. stock indexes, led by the Nasdaq, which closed at a record 27,122.094 points, surpassing its previous closing high of 27,093.901 reached in June.

Fiscal caution

Although the latest polls continue to show President Luiz Inácio Lula da Silva of the Workers’ Party (PT) and Senator Flávio Bolsonaro of the Liberal Party (PL) statistically tied in a potential runoff, Deutsche Bank’s Latin America economics and strategy team sees reason for caution.

The bank’s analysts said either candidate would face difficulty delivering substantial fiscal adjustment early in the next administration because of a “highly fragmented political landscape.”

In a report, the team said only a “modest” political and fiscal risk premium is currently priced into fixed income.

“We see lower rates under most fiscal regimes, but remain cautious given a tight election and fiscal uncertainty.”

The strategists are therefore maintaining only a curve-steepening position, designed to benefit from a wider gap between January 2029 and January 2031 DI (Interbank Deposit) futures rates.

On Monday, the January 2029 rate fell to 13.71% from 13.83%, while the January 2031 rate dropped sharply to 13.91% from 14.03%.

Equity gains

The decline in futures rates helped bolster the Ibovespa, which closed 0.74% higher at 186,596 points. Gains were limited by a 1.12% drop in Vale and a 1.03% decline in Petrobras preferred shares.

Beyond supporting the broader market, expectations of a possible change in government have recently increased demand for somewhat riskier stocks, Bank of America said.

BofA analysts said in a report that local investors have become more constructive on Brazilian equities, while foreign investors remain reluctant to increase risk exposure.

Defensive positioning remains concentrated in names such as electrical equipment maker WEG and infrastructure operator Motiva, while a higher-beta basket led by car rental company Localiza, toll-road operator EcoRodovias and truck and machinery rental company Vamos has attracted more interest, mainly as a tactical adjustment to the macroeconomic outlook.

Real outlook

Some foreign banks are also taking a more cautious view of the real. Deutsche Bank has reduced its position in the currency and now holds a neutral view, warning that “risks remain two-sided and positioning looks stretched” ahead of the election.

“Near-term risks are rising as fiscal and political concerns related to the elections intensify and seasonality turns less favorable in the second half. All of this is happening against an external backdrop that is less supportive for emerging-market currencies,” economists and strategists Francisco Campos, Beatriz Nunes, Christian Rojas and Carlos Muñoz-Carcamo said in a report.

The Deutsche Bank team nevertheless said Brazil’s favorable external accounts and high carry continue to support the real.

The exchange rate per U.S. dollar closed 0.7% lower at R$5.10 in the local market on Monday.

Hawkish comments from Federal Reserve officials during the day may have supported the U.S. currency, even as Treasury yields fell at the intermediate and long end of the curve. Short-term yields edged higher.

Late in the session, the two-year Treasury yield was at 4.75%, up from 4.75% in the previous session, while the 10-year yield fell to 4.97% from 4.99%.

*By Bruna Furlani,Maria Fernanda Salinet,Arthur Cagliari,Luana ReisandGabriel Caldeira— São Paulo

Source: Valor International

https://valorinternational.globo.com/