The number of the night is 8.7%. That is how much the main fund of Brazilian stocks traded in New York climbed on Sunday evening (4), just hours after the vote count confirmed that Senator Flavio Bolsonaro finished the first round of the presidential election ahead of President Lula. In practical terms, anyone with R$ 10,000 in that kind of fund saw it grow by about R$ 870 in a few hours, a gain a conservative investment would take months to deliver.
The race now goes to a runoff on October 25. According to InfoMoney, Bolsonaro, the eldest son of former president Jair Bolsonaro, took 47.50% of valid votes against 44.61% for Lula, a gap of roughly 2.6 million votes. Most polls had pointed to a statistical tie with a slight edge for the incumbent.
For ordinary Brazilians, the most direct signal is the dollar. Analysts interviewed by Folha de S.Paulo and InfoMoney expect the US currency to fall and the Sao Paulo stock exchange to rise when trading opens on Monday (5). A cheaper dollar eases fuel prices, imported goods and airfares in the coming months.
What the EWZ is
The EWZ is an exchange-traded fund listed in New York that bundles the 46 main Brazilian stocks. Because it is bought and sold by foreigners, it works as a thermometer of overseas investor sentiment toward Brazil. According to VEJA magazine, the EWZ was up 8.72% around 9:50 p.m. Brasilia time on Sunday, at US$ 41.52 per share, while Folha reported that a Brazilian equity fund surged more than 8% at the opening of trading in Japan.
Behind the optimism is the bet on fiscal adjustment, the effort to cut government spending and slow the growth of public debt. "We expect a strong stock market rally, an appreciation of the real and lower interest rates, with the market pricing in a Flavio victory," Felipe Balassiano, head of multi-asset funds at ASA, told InfoMoney. Gustavo Sung, chief economist at Suno Research, cited J.P. Morgan's assessment that a win by the senator could unlock a stock market gain of up to 28%.
Recent history helps explain the distrust toward the current government. According to VEJA, Brazil's gross public debt rose from 72% to 83% of GDP during Lula's third term. A week before the vote, press reports, not officially confirmed by the campaign, said Bolsonaro would, if elected, propose a constitutional amendment cutting R$ 300 billion in spending, more than ten times the annual budget of Bolsa Familia, the country's main cash transfer program.
Not everyone believes the rally will last. Sung himself warns that the gains will only hold if the economic agenda becomes concrete policy during the transition: "Without that, expectations will be frustrated and, within six to twelve months, the noise may return." Until October 25, markets will read every new poll as a clue to whether the relief in the dollar rate and in investment returns will actually reach workers' pockets.