Brazilian shares are stable; real falls after irruption supporters of Bolsonaro

Brazilian stocks were trading flat on Monday morning and market players were preparing for new volatility after thousands of supporters of the former president Jair Bolsonaro stormed government buildings in the capital, echoing the US insurrection of January 6, 2021.

The Brazilian real weakened about 0.5% against the dollar in spot trading, while the country’s benchmark stock index, Bovespa, was broadly unchanged, underscoring the small impact of the unrest on markets.

With the situation contained, we expect a limited effect on Brazilian assets, despite the strong negative impact,” analysts at brokerage XP Investimentos said in a research note.

The coordinated invasion on Sunday afternoon, which overwhelmed law enforcement and left the Federal Supreme Court building and other locations in Brasilia with extensive internal damage, stunned observers, including many in the financial industry.

“We were surprised by the level of violence,” said Matheus Spiess, an analyst at Empiricus. “The Brazilian stock market had gotten off that noise about a possible institutional breakdown, so we can definitely see some negative effects.”

economists from JPMorgan y Capital Economics they said that the implications of the violence would be short-term and mainly political, although they noted that leftist President Luiz Inácio Lula da Silva and his new government’s agenda could be strengthened.

“The unrest could result in a lasting risk premium on the country’s financial assets, particularly if they cause President Lula to double down on his economic agenda,” said William Jackson, chief emerging markets economist at Capital.

The real and the Bovespa, which outperformed other emerging markets in Latin America for most of 2022, had already been hit by turbulence in the first days after Lula’s inauguration on January 1 over concerns. about increasing public spending.

Both had a good session on Friday after Lula said the country’s economy could grow while government finances were kept in check.

“As the president grows stronger and the opposition weakens, you could see more radicalization on the left, perhaps pushing the agenda further than one would think,” said Emy Shayo Cherman, Latin America equity strategist and JPMorgan Brazil.

Mariano Machado, principal analyst for the Americas at risk intelligence firm Verisk Maplecroft, said events in Brasilia would undermine fragile market confidence in Brazil and said investors should prepare for volatility ahead.

Still, some analysts said any negative market reaction to the latest events could be temporary.

On Monday, hundreds of Brazilian police officers in riot gear and some on horseback gathered at a camp of Bolsonaro supporters near the Brasilia Army headquarters. Lula has vowed to bring those responsible for Sunday’s violence to justice.

“Given that the situation appears to be under control in Brasilia, I would expect any impact on the asset class to be short-lived,” said Alejo Czerwonko, chief investment officer for Emerging Markets Americas at UBS Global Wealth Management.