Market has restrained reaction to attacks in Brasília

It looked like it would be a bad day for local markets after the attacks by radical Bolsonaristas in Brasília on Sunday. However, the perception that the risk of an institutional crisis has been controlled and should not gain greater proportions led local assets to outline a slight reaction during yesterday’s trading session. 

The stock market and interest rates even abandoned the worst moments of the beginning of the day and ended the session in a more positive tone. The exception was the real, which devalued even with the dollar falling against the vast majority of emerging and developed currencies.

The dollar advanced 0.41% against the real, at R$5.2570, but was far from the high of R$5.3085. More resilient to internal pressures in recent months, the exchange underwent a correction yesterday. The Ibovespa, on the other hand, closed with a slight increase of 0.15%, at 109,130 points, after touching 109,938 points at the intraday maximum and 108,134 points at the minimum. The Interbank Deposit (DI) contract rate for January 2024 dropped from 13.595% at Friday’s close to 13.575%; while the DI for January 2027 fell from 12.79% to 12.71%.

The markets dawned under the tension of the acts of political extremism observed in Brasília. The opening of the session showed negative dynamics, but relatively calm for the assets, with no large spikes in volatility. The momentary view of market participants is that the response of Brazilian institutions to episodes of political violence was satisfactory. And, due to the lack of support from political leaders, the episode may have reduced the space for new radical adventures by supporters of the former president, in the view of the agents.

This assessment also took place under the positive impulse of global financial markets, as expectations grow for the end of the cycle of monetary tightening in the United States and as the reopening of the Chinese economy gains traction with news of the relaxation of the zero covid policy.

Western Asset’s director of investments in Brazil, Paulo Clini, says that, initially, he expected a negative reaction that would last for a few days. However, the absence of short-term economic impacts from the acts, in addition to the apparent institutional control, made the agents calm down. “Investors did not ignore the issue, but there was no overreaction because of the limited practical impact. The exchange suffered a little more because it had been showing more resilience than other markets and this would need an eventual adjustment.”

Clini shows, however, concern about how the priority level of the economic agenda will be, since the political pressure should not cease.

Along these lines, for British consultancy TS Lombard, with the government’s quick response, the impact on the market was limited. “But the riots could reduce the pressure on President Luiz Inácio Lula da Silva (PT) to present an economic plan in the coming weeks and could also delay the reform agenda”, he says.

According to the director of economic research for Brazil at TS Lombard, Elizabeth Johnson, the events of political violence registered on Sunday in Praça dos Três Poderes should help Lula, since the majority of the population should condemn the acts. For her, the episode even reinforces the prospect of former president Jair Bolsonaro (PL) ending up convicted and becoming ineligible in the coming years.

The J.P. Morgan also expects prolonged political impact. For the bank, the events make Lula da Silva stronger. “As the president grows stronger and the opposition weakens, there may be radicalization on the left, perhaps influencing the agenda more than previously realized, although Congress remains dominated by centrist parties that, at least in theory, would be a force against radicalization”.

Equity strategists at J.P. Morgan also point out that the events in Brasília are different from the attack on the Capitol in the United States, in January 2021. The fact that there is no clear demand and that the Brazilian president and his ministry have already taken office are some of the contrasts between situations. The note also highlights that, on Sunday, “the buildings were practically empty at the time of the invasion, limiting the damage in terms of numbers of injuries and deaths”.

It is also important to check whether other protests of the type will occur and, if so, what will be their intensity, ponders the bank. An important factor is that the movement does not spread to other states and that new events are avoided, such as a truck drivers’ strike.

For the Brazilian stock market, the expectation is that, as soon as the situation calms down, the global outlook, with factors such as the reopening in China and a spike in US interest rates, can guide prices. In the short term, however, volatility tends to increase. The sectors evaluated positively by the American bank’s strategists are financial; discretionary consumption; food and drinks; and basic materials.

Andres Abadia, chief economist for Latin America at Pantheon Macroeconomics, also believes that local asset fundamentals and other macroeconomic factors such as China’s reopening process, the end of the US monetary tightening cycle and the design of the local fiscal framework, must impose.

“The acts may even affect projections and increase risk premiums in the short term. It is not our base case, but it is something that is on the investor’s radar. Let’s see how it unfolds. By all indications, control of the situation has already been regained and the most relevant opposition figures, such as former President Jair Bolsonaro, did not support the movement. If there really isn’t an escalation in tension, the event could turn out to be a buying opportunity as China’s reopening and the end of the US tightening cycle are priced in,” he says.

With information from Valor Econômico