“Although we’re still a year and three months out from the election, the race is already shaping market behavior, and that influence will only grow,” Mr. Hartung says. His base case sees a tight contest but assigns higher odds to the opposition winning. “There’s still a lot that can happen, but based on what we’re seeing today, we think an opposition victory next year is more likely.”

This view stems, he says, from growing signs of structural unpopularity in President Luiz Inácio Lula da Silva’s administration, as well as the potential for the opposition to be led by well-rated governors from the South, Southeast, or Center-West regions. “It’s a competitive race on both sides, but there are clear signals that the opposition has a real shot.”

Electoral dynamics are already impacting asset pricing. Mr. Hartung notes that recent market deterioration coincided with a bump in Mr. Lula’s popularity. He believes the “election trade” will only intensify, and by the second half of 2026, markets may become almost entirely election-driven. “For now, investors are still focused on inflation, activity, and fiscal issues… And on that front, fiscal uncertainty is mounting due to the government’s expected response to Trump’s tariffs—what kind of support package it might roll out for affected companies.”

Depending on the scope of that support package, risk repricing may follow. “It’s a cause for concern,” Mr. Hartung says, warning it could complicate the Central Bank’s work if the aid proves large enough.

He adds that rising tensions between Brazil and the U.S. remain on his radar. “The tariff risk is what’s been driving recent volatility in the yield curve. Not so much because of the 50% hike itself, but because of fears of escalation. From a trade dispute, it could extend to financial flows,” Mr. Hartung warns, noting the U.S. is a crucial source of both direct and portfolio investment in Brazil.

“It’s the single largest source of FDI and also of portfolio flows into the country,” he says. “There’s an estimated stock of U.S. investment in Brazil worth close to 15% of GDP. If that flow is restricted, we’ll see significantly more market stress. That’s why people are getting nervous. When the Brazilian government criticizes the U.S., the market reacts badly. And when the U.S. hits back, the market suffers too.”

This fear, Mr. Hartung says, is contributing to a higher risk premium in the domestic yield curve, which has steepened recently due to a jump in long-term rates—now approaching 14%. “It’s unlikely we’ll actually see restrictions, because those would be extreme measures and rare for the U.S. But the risk is there, so the premium is too.”

SPX’s base case sees economic activity, already showing signs of slowing, weakening further by year-end—despite near-term noise from a large court-ordered payment of government debts (precatórios). “The trend is clear—we’re slowing down, and this is already evident in investment and consumption data. By the end of the year, it’ll likely be visible in the labor market too. If the Central Bank does nothing, the slowdown could become self-reinforcing.”

That’s where SPX sees room for interest rate cuts. “There’s space for yields to decline. Selic is at 15%—an unusually high level, even for Brazil. It’s hard to imagine we won’t see some easing next year. And based on current pricing, markets are still projecting only a modest rate-cut cycle,” Mr. Hartung says.

He reveals that SPX holds long positions in nominal rates (which gain when rates fall) and currently prefers the nominal curve over real rates extracted from inflation-linked NTN-Bs. Shorter maturities have already priced in a significant drop in “implied inflation,” but mid-curve inflation expectations remain elevated. “So, in a scenario of slower growth and falling inflation, we expect further compression in the belly of the curve. Real rates may fall, but not as much as nominal ones. That’s why we see nominal rates as more attractive right now.”

Mr. Hartung also notes a global trend of steepening yield curves, driven by sharply expansionary fiscal policies in developed economies. “Over time, governments compete for capital to finance their deficits. That usually pressures the long end of the curve,” he explains.