This year, Brazil’s assets had outperformed their peers this year as investors became convinced that Luiz Inácio Lula da Silva would be a safe pair of hands for the economy. However, now that he is about to take office, they are not so sure.
After winning the election last month, Lula da Silva has stepped up his plans to boost social spending, while his transition team includes names who played key roles in the government of Dilma Rousseff, his handpicked successor who led the economy to a severe recession.
“The names being thrown around don’t inspire any confidence about a differentiation with a Dilma regime,” said Hari Hariharan, chief executive of New York-based NWI Management.
This has been enough for Citigroup (C) to advise clients to cut their exposure to Brazil, and for local assets to lead global declines last week.
The real slumped 1.1% against the dollar on Wednesday, after plunging 5% last week, the worst-performing currency after the Ghana cedi among more than 140 currencies tracked by Bloomberg.
Interest rates on swaps due 2029 gained 17 basis points last week to hit the highest level since July, while the Ibovespa index plunged 5%, the biggest drop since June.
Shares resumed selling on Wednesday as markets reopened after a holiday and the Ibovespa plunged 3% to lead global losses.
MARKET FOCUS
Traders will focus this week on the formal announcement of a draft constitutional amendment to authorize more spending, Olga Yangol, head of emerging markets strategy at Credit Agricole SA in New York, wrote in a Monday note.
Lula da Silva’s transition team wants to finish the project by Wednesday, according to Senator-elect from the Workers’ Party, Wellington Dias. Earlier, lawmaker Paulo Pimenta said it is not yet clear whether the bill will be valid for only one year, adding that it will not set a specific amount for spending initially.
The market is also awaiting any indication regarding the election of Lula da Silva’s Economy Minister. Local media reported that market favorite Henrique Meirelles, former São Paulo mayor Fernando Haddad and former Health Minister Alexandre Padilha were all being considered.
Lula da Silva said he will not give any details about his cabinet before he returns from an international trip to attend COP27 in Egypt.R
“The stakes are high in terms of fiscal uncertainty, in terms of cabinet composition, in terms of key appointments in the economic team,” said Joel Virgen Rojano, director of Latin America strategy at TD Securities. “All of that for now has a very big question mark and the markets are getting impatient.”
With information from Bloomberg Línea