Brazil markets rally as oil prices climb and election draws focus
Alfredo Menezes, of Armor Capital
Gabriel Reis/Valor
A perspective of a tighter presidential race, combined with higher oil prices, paved the way for gains in Brazilian stocks and the currency in Tuesday’s session (1). Local interest-rate futures also benefited from the more constructive domestic environment, even as rates abroad came under greater pressure.
By the end of the day, the benchmark Ibovespa index had risen 1.30% to 179,722 points, while the spot dollar fell 0.47% to R$5.1556. The real was the second-best performing currency of the day, behind only the Colombian peso. Meanwhile, the January 2031 Interbank Deposit (DI) rate fell to 14.405% from Monday’s settlement rate of 14.50%.
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The latest polling data showed the presidential race heading toward a tighter contest between President Luiz Inácio Lula da Silva of the Workers’ Party (PT) and Senator Flávio Bolsonaro of the Liberal Party (PL). Investors see the opposition as raising the prospect of fiscal policy changes, helping reduce risk premiums priced into Brazilian assets.
Alfredo Menezes, partner and chief investment officer (CIO) at Armor Capital, said the tighter electoral race may have benefited local markets on Tuesday. “A good gauge of this is the long end of the curve,” he said, referring to long-term interest-rate futures. “Long-term [U.S.] Treasury yields opened higher, and even so, our rates fell. We know our long-term rates are closely tied to expectations for a fiscal adjustment. So a tighter race can reduce the premium embedded in those rates,” he said.
The stocks that benefited most on the day also provide a gauge of market dynamics, Menezes said. “Banco do Brasil shares rose sharply and were not helped by oil prices, as Petrobras was,” he said. “Oil prices may have helped the index and the currency to some extent, but what seems to be driving the market is the election.”
Following Tuesday’s gains, Brazilian stocks have risen 2.31% over the past two sessions, extending their winning streak to 10 consecutive sessions.
Michel Frankfurt, head of brokerage at Scotiabank Brazil, said the Ibovespa’s decline throughout July and part of August was driven by the perception that there would be no change in government and by the absence of foreign investors during the vacation period. A week ago, however, there was a turnaround, with nearly $1 billion flowing into local equities.
“Polls started to show an improvement for the challenger [Flávio Bolsonaro], while equity positioning was very light. Local investors were pessimistic, and foreigners were pulling money out, also amid competition from artificial intelligence,” Frankfurt said. “You start looking at the proposals, the potential appointments, who would make up the teams, and that began to give the market a boost.”
Despite the gains, the executive said he believes there is room for a further rally if there is a “strong indication” of a change in government. “The election is the main domestic factor for asset prices from now on, even though we remain exposed to external developments,” he said. “Companies are being squeezed by uncertainty over the fiscal outlook, and as sentiment improves, animal spirits return, and the economy gets moving again.”
In the afternoon, traders also cited reports linking Federal Supreme Court (STF) Justice Alexandre de Moraes to former banker Daniel Vorcaro as another factor supporting local assets. “This reinforces the idea that Lula is weak, even if the connection is not as direct,” a portfolio manager said on condition of anonymity.
Market participants were also struck by the fact that the external environment had become less favorable while local assets continued to perform well. “The market is improving on expectations of a tighter election and a more favorable environment for Flávio,” said a member of a bank’s treasury desk. “The problem has been the external environment, but the local market is now managing to decouple from it to some extent.”
The same trader said second-quarter GDP data also helped reinforce the decline in interest-rate futures. Although the 0.5% increase in GDP slightly exceeded market expectations, the result was driven by surprisingly strong performances in the agricultural and industrial sectors, which are less dependent on demand and therefore less sensitive to the monetary policy of the Central Bank.
The data therefore reinforced the perception that the Brazilian economy is slowing and strengthened expectations that the Monetary Policy Committee (Copom) will have room to continue cutting the Selic policy interest rate beyond its next meeting, scheduled for September 16.
Expectations for a less hawkish Central Bank prompted Deutsche Bank to revise its base-case scenario, which had included a pause in the rate-cutting cycle with the Selic at 14%, to incorporate another 25-basis-point cut, to 13.75%. For the team led by Francisco Campos, the bank’s chief economist for Latin America, further monetary easing beyond September will depend on the election period.
Against this backdrop, Deutsche Bank continues to favor a steepening of the yield curve. The strategy “provides a clear view that the long end of the curve will likely remain under pressure as political uncertainty increasingly comes into focus, while intermediate-term rates may continue to reprice for a less hawkish stance by the central bank, as data continue to point to weaker growth and inflation dynamics that are gradually improving.”
