Volatility Is the Base Case
Traders expect big swings once results hit because a neck-and-neck presidential contest kept them from leaning too hard in either direction ahead of the vote. Natalia Gurushina - Van Eck Associates Corporation's chief economist for emerging markets - said, "Orthodox fiscal policy U-turns are handsomely rewarded by the market, which is why investors remain fixated on the first round of Brazil's presidential election." She added that the tight polling leaves room for a selloff if the outcome proves "disappointing."
Two Election Setups, Two Very Different Market Reactions
Mauricio Moura, co-founder of Zaftra, said that if President Luiz Inácio Lula da Silva finishes the first round ahead by over four percentage points, it would reinforce his edge heading into the Oct. 25 runoff. In that scenario, he expects equities could come under strain, the swap rates curve could steepen, and the real might face headwinds.
By contrast, Moura said a slimmer spread or even a tie would be viewed as relatively better for Flávio Bolsonaro, potentially igniting a rally on expectations the right-wing contender would pursue a meaningful fiscal adjustment that investors deem essential.
Elections reprice currencies and bonds faster than almost any other event. Market Briefs follows those moves free every weekday.
What the Models Say
Bloomberg Economics estimates a Bolsonaro victory could lower 10 year yields by roughly 70 basis points and lift the currency by almost 3%. It also projects that a Lula win could push long yields up by nearly 100 basis points and drive the real down by over 3.5%. Bloomberg Intelligence notes that positioning along the rates curve looks crowded, making it prone to a swift snap-back should the incumbent do better than expected.
JPMorgan's Sept. 29 note sketched two paths. In a fiscal-improvement case, it sees the real appreciating roughly 6%, local government bond yields moving toward 13%, and equities climbing up to 50% from where they are now. Under incremental fiscal deterioration, it foresees the real sliding about 6%, bond yields drifting toward 15.5%, and equities falling 21%.
How Pros Are Positioned, And Why It Matters To You
Eduardo Cohn, a portfolio manager at Heritage Capital Partners, said he put on "marginal" positions that would benefit if Bolsonaro prevails. He prefers longer-maturity NTN-Bs - Brazil's inflation-linked government bonds - and thinks real yields could narrow if the right-wing candidate prevails.
Bottom line for your wallet: markets are set to move quickly on perceived fiscal discipline. If investors see a credible pivot toward orthodoxy, Brazil assets have room to run. If the readout tilts the other way, the playbook points to weaker FX, higher yields, and softer stocks.
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