Goldman says the utopian cycle for Brazilian assets is ‘partially unlocked’ after the first round and there is room for more

Markets initially responded positively last week to the vote in the first round of the Brazilian general election (With the rise in Ibovespa, lower interest rates and the dollar). This is to the extent that, in assessing financial agents, there has been a reduced chance of a destabilizing change towards unconventional economic policy in Brazil, as Goldman Sachs explained.

In the assessment of the US bank, it is possible that the real and reference rates will strengthen if the result of the second round is recognized by the two presidential candidates, Luis Inacio Lula da Silva (PT) and Jair Bolsonaro (PL).

The first-round results (with a smaller distance between the candidates and the more conservative Congress), Goldman assessed, were not necessarily seen as a reduction in the likelihood of Lula winning, but as potentially as a decrease in the potential for destabilization. The change towards unconventional (financial) policy in Brazil.

The elections have partially opened a virtuous cycle in exchange rates and domestic interest rates. In our view, the magnitude of market moves since the first round also suggests that some macro investors may wait for a reduction in electoral uncertainty before engaging more effectively with a more positive macroeconomic narrative in Brazil. Report strategists Ian Thumb and David Krusella.

They noted that so far markets are absorbing a more intense conflict, as some surveys have shown since Brazil’s first round.

They believe that it is not necessarily clear that the narrow term is risk-free: in particular, the markets are now likely to see more volatility until the 4th of September. [dia da votação do 2º turno]the October campaign is highly competitive, rather than what many assumed was the first-round finale, and the potential to raise more questions about whether the final vote will be respected.

“While markets have responded positively to the moderate tightening in the polls, increased fundamental risks could generate more volatility in Brazilian assets during October,” say strategists.

After these risks, Thumb and Crusella indicated that they are bullish on the prospects for Brazilian assets.

They estimate that “if Brazil’s October 30 second-round result is recognized by both sides and continues to indicate a moderate left-wing risk to national politics, there is room for a further rally in the assets.”

Strategists also point out that the real risk premium is still around 20%. They also point out that the domestic exchange rate should benefit from the higher interest rate in Brazil, bearing in mind that the exchange rate should remain unchanged for a long time, even if the de-inflation process continues.

The interest rate market should also benefit from continued changes in the Brazilian exchange rate, “since real currency strength – one of the few significant currencies that has outpaced the dollar in the cumulative year – helps further cool the Brazilian inflation scenario, which is already decoupled from other emerging markets,” according to strategists.

Bank experts note that the market reaction has been more subdued, indicating the possibility of a sharper recovery after the elections. The recommendation is for applicable positions in the January 2025 interest rate futures contract, which may drop below 11%.

There should also be an impact on the stock market. “Brazil’s virtuous cycle in foreign exchange and interest markets may have repercussions in the stock market, as we reiterate our recommendation to stay long in cyclical assets against defenses,” they say.

We stayed until October.

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