The Sao Paulo Stock Exchange climbed 5.20% on Monday afternoon, the day after the first round of the presidential elections in Brazil and the conservative wave that was imposed in parallel in the Brazilian Congress.
According to analysts, the Ibovespa, the main index of the São Paulo Stock Exchangereflects the optimism given the strong support for the far-right president, Jair Bolsonaro, who obtained 43% of the vote, compared to 48% for his leftist rival, Luiz Inácio Lula da Silva, and the election of legislators favorable to liberal policies.
The market movements are explained because “regardless of who wins the second round, they will have to govern with a Congress more oriented to the right, more liberal and pro-market, with great weight”, analyzes the economist Igor Macedo de Lucena.
Lula prevailed with 48%, a five-point advantage over Bolsonaro, far from the 14 points predicted by the polls. The dispute will be defined on October 30.
In the Congress, the Liberal Party (PL), to which Bolsonaro belongs, increased its base as the largest bench in the Chamber of Deputies (from 76 to 99, almost a fifth of the total), and also became the largest minority in the next Senate (adding eight places , for a total of 15 seats in 81 senators in total).
In addition, the center parties gained more positions, while Lula’s PT (Workers’ Party) advanced but less than expected.
This balance of forces would reduce room for maneuver for an eventual government of the left-wing leader, who embodies proposals that worry the market, as they are favorable to workers and a stronger State.
“The market considers that if there were a victory for Lula, he would not be able to make the drastic changes he promises, and if Bolsonaro wins, there would be a more favorable composition in Congress” to continue with his liberal agenda, says Jason Vieira, chief economist at the asset manager Infinity Asset Management.
For example, Lula it would have difficulties to alter the operating rules of the Central Bank or review the labor reform, exemplifies De Lucena.
On the other hand, he adds, investors ponder “a possible advance by Bolsonaro, if he were re-elected, in the privatization and infrastructure agenda, and reforms such as administrative and tax reforms.”
To maintain the leadership and be able to govern with the new composition of Congress from 2023, “Lula needs to approach figures who represent a more moderate economic policy,” according to Vieira.
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