Lula cabinet speculation, Brazil political tension spell market volatility


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SAO PAULO — Brazilian financial markets may be in for a volatile week after leftist Luiz Inacio Lula da Silva won Sunday’s presidential election, with investors gauging speculation about his cabinet and the risk of his defeated rival questioning results.

Investors will be closely watching for signs of political tension that could create turmoil or derail expansion of Latin America’s largest economy. With economic growth of 2.7% expected for 2022, Brazil’s Bovespa equities market has risen 14.8% in U.S. dollar terms this year, the second-best among the world’s benchmark indices, while its currency the real has gained 5.2% against the greenback.

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Incumbent President Jair Bolsonaro has made baseless allegations about fraud in Brazilian elections and last year discussed refusing to accept the results of the vote.

He and his campaign were silent in the hours after election authorities declared Lula’s victory, and a senior aide said Bolsonaro would not make a speech until Monday.

“We expect some noise from Bolsonaro supporters, but it does not seem to threaten institutions,” said Ricardo Lacerda, the founder and Chief Executive Officer of investment bank BR Partners.

In his victory speech on Sunday night, Lula promised to unite a divided country. He invited international cooperation to preserve the Amazon rainforest and said he will seek fair global trade rather than trade deals that “condemn our country to be an eternal exporter of raw materials.” He also said he is worried about Bolsonaro allowing an orderly transition.

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Lula has been cagey about potential cabinet choices while on the campaign trail, but several trusted allies from his Workers Party (PT) are expected to take key posts in the new government on Jan. 1.

Ahead of the vote, Citi analysts led by Donato Guarino said Brazil’s institutions “are prepared to derail any contesting efforts made by Bolsonaro regarding the election results,” with electoral courts expected to shoot down any of Bolsonaro’s allegations.

JPMorgan analysts said “political tension may increase in the near term, and we will be closely monitoring this tail-risk.”

Most analysts said they expected any effort by Bolsonaro to challenge the results would be short-lived. However, it may take longer to get better visibility of the incoming government.

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“The most important focus for the market will be on Lula’s nominations to Minister of Finance and Budget Planning,” the Citi analysts said. Their report said the most likely outcome is an appointment of a well-known PT politician such as Alexandre Padilha backed by a respected economic team that would be announced closer to Lula’s inauguration.

On equity markets, state-controlled companies are expected to suffer, as Lula’s victory rules out the promise of privatizations floated by Bolsonaro.

Francisco Levy, chief strategist at Empiricus Investimentos, flagged shares in state oil company Petrobras and state lender Banco do Brasil SA as the most affected.

But Levy said Lula’s positive image overseas could reduce worries about potential unorthodox economic policies.

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“A favorable international reaction to Lula may help,” he said. Lula was quickly congratulated by the White House and European governments. He added that the most important factor to markets on the long term will be Lula’s economic policies.

Goldman Sachs analysts said in a report on Sunday that financial markets will react positively to signs of social peace, political stability, and policies and reforms that would leverage investment and growth. Over the last 11 years, there was no growth in real gross domestic product per capita.

Markets will be attentive to the magnitude of the spending-ceiling waiver to accommodate campaign promises, and a more detailed outline for proposals such as the tax reform and the new fiscal anchor to replace spending the ceiling and potential labor reform changes, the Goldman analysts said. (Reporting by Tatiana Bautzer and Gabriel Araujo in Sao Paulo; Additional reporting by Paula Laier, Jamie McGeever and Rodrigo Campos; Editing by Christian Schmollinger)



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