Financial markets may have been wrong to believe that President-elect Luiz Inácio Lula da Silva would pursue an orthodox fiscal agenda, Citi said in a report, adding that the bank decided to cut its risk exposure to Brazil in the face of this reassessment.
“The market seemed to have convinced itself that President (elect) Lula would be fiscally orthodox. The most recent news stream now casts doubt on that hypothesis,” Dirk Willer, Citi Research’s head of emerging markets strategy, wrote in the document, released on Thursday night (10).
His comment came after Brazilian assets plummeted on Thursday (10), penalized by fears of fiscal mismanagement during Lula’s government. PT plans to propose a constitutional amendment to accommodate out-of-ceiling spending in 2023 and has repeatedly criticized Brazil’s current tax rules. Investors also reacted badly to the inclusion of former finance minister Guido Mantega, seen as less orthodox, in the president-elect’s transition team.
On Thursday, the dollar soared more than 4% against the real, the biggest daily gain since the beginning of the pandemic, while the Ibovespa plunged 3.35%, the strongest drop since November 2021. The movement contrasted with the soaring of Brazilian assets in the week. that followed Lula’s election.
“Brazil’s assets were proving to be quite attractive before this event… Therefore, the allocation is likely to be saturated, which could lead to a reaction time longer than just one day”, warned Willer about the real’s tumbles. and Ibovespa and the rise in future interest rates.
“The fact that the news comes at a time when the rest of the emerging universe is receiving strong support from a lower-than-expected US consumer price index does not help. said the strategist.
Among the measures adopted, he detailed that Citi reduced its short positions in the Australian dollar/Real pair (which bet on the fall of the Australian currency against the Brazilian currency) and took Brazil’s positions in its portfolio of securities from emerging markets back to neutral.
Despite Citi’s apprehension, Willer pondered that the US bank believes that Brazil’s elected government may eventually moderate its stance on the fiscal.
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