Local assets fall as Brazil-U.S. tensions escalate

Risk aversion deepened in the afternoon as traders also began factoring in the political landscape. Rumors about new popularity polls for President Luiz Inácio Lula da Silva rattled markets further, particularly in currency and interest rate trading.

In just two sessions, the real erased all of its recent gains, with the dollar closing up 1.19% at R$5.4993, the highest level since August 5. In the rates market, intermediate maturities priced in significant risk premiums, with the January 2029 DI climbing from 13.235% to 13.48%, its highest since July 31.

The Ibovespa, which had avoided Monday’s risk-off mood, ended Tuesday down 2.10% at 134,432 points, dragged by heavy losses in bank shares.

Real interest rates, measured by NTN-Bs (inflation-linked government bonds), also moved higher. Yields rose more than 10 basis points across nearly all maturities, reflecting both market stress and a hefty R$1.3 million supply of NTN-Bs offered by the National Treasury on Tuesday.

According to SulAmérica Investimentos CIO Luís Garcia, the market had remained relatively calm when tensions were limited to trade frictions or sanctions against specific officials. “But the Supreme Court’s signal could prompt a counter-response from Washington and lead to a much more troubling scenario,” he said.

Mr. Garcia warned that the greatest risk would be U.S. sanctions affecting Brazil’s access to the Swift payment system, which connects financial institutions worldwide. Such a move, he said, could disrupt foreign capital inflows, push the dollar back toward R$6, and fuel inflation expectations, potentially jeopardizing the Central Bank’s rate-cutting cycle.

The worst-case scenario, he added, would involve measures affecting not just new flows but also existing investments in Brazil.

For now, SulAmérica is taking tactical positions in local markets rather than holding assets for long. If tensions ease, Mr. Garcia sees room for the real to strengthen further and for future rates to fall, supported by Brazil’s monetary easing cycle.

Still, he noted that long-term rates have remained stubbornly high, even during periods of market optimism. “The exchange rate is the most popular risk gauge, but it doesn’t reflect fiscal concerns as strongly as the long end of the curve,” he said.

Adding to the day’s volatility, traders circulated rumors that an upcoming poll would show improving electoral prospects for the government, prompting investors to demand higher risk premiums.

A foreign fund manager, who requested anonymity, said risks are far from benign, especially since U.S. sanctions are politically driven and likely to escalate tensions. “Under these circumstances, markets can quickly turn very volatile, with rumors surfacing and undermining investor confidence even when denied,” the manager said.

On the political front, he argued that polls should not yet carry such weight, given the time remaining before elections and uncertainty over candidates. “But something has broken in the positive momentum, and that will have a lasting effect on investor confidence,” he said. “I’ll be more cautious going forward, especially in FX, and this reinforces my view that the DI curve should steepen—with weaker growth requiring lower short rates, while shaken confidence drives outflows at the long end.”