Brazil’s Markets May Gyrate Ahead of Runoff Election

October 10, 2022

Brazil often surprises, and this year’s presidential elections were no exception. Investors might want to continue expecting the unexpected.   

When Brazilians voted for their next president on Oct. 2, polls indicated that former President Luiz Inacio Lula da Silva would beat incumbent Jair Bolsonaro. Lula surprisingly fell short of the 50% majority required, forcing an Oct. 30 runoff against Bolsonaro.  

The surprise result led to a rally in the Brazil real versus the U.S. dollar and Brazil’s stock market. The iShares MSCI Brazil ETF (EWZ) holds shares in the country’s leading companies.  

While polls still favor Lula, Bolsonaro could surprise again. Markets embrace capitalism and favor business-friendly leadership over socialism. Brazilians face a choice between an unpopular current leader and a former leader with a corruption conviction.  

Brazil’s Vast Raw Material Resources 

Brazil supplies the world with a range of commodities. It’s the top producer and exporter of coffee, sugar and oranges, and a leading exporter of soybeans, rice, corn, cotton, beef, beans and wheat. It also produces and exports ethanol, iron ore, tin and phosphate, and has substantial diamond, manganese, chromium, copper and bauxite reserves.  

Worldwide inflation has caused commodity prices to rise, boosting the country’s economy. However, COVID-19 tore through the country and weighed on the economy, and badly sidetracked. Bolsonaro’s more ambitious plans. Brazil historically has had close ties with the U.S. and Russia, making the country influential in the current geopolitical landscape. 

 

EWZ Exploded After the Election 

Source: Yahoo Finance 

 

EWZ has more than 19% exposure to VALE SA (VALE), a leading multinational commodity producer. VALE’s website states it is the “world’s largest producer of iron ore, pellets and nickel.” EWZ also holds more than 10% exposure to Petrobras (PBR), Brazil’s multinational energy giant with headquarters in Rio de Janeiro.

 

Source: Barchart 

 

The chart above shows that after closing at the $29.63 per share level on Sept. 30, EWZ gapped higher to $33.20 on Oct. 4 in the aftermath of the election surprise. At $32.86 on Oct. 6, EWZ was not far below the most recent high, which was the highest level since early June.  

Meanwhile, Brazil’s real rallied after the recent election despite the bullish price action in the U.S. dollar index, which is trading at a two-decade high.  

 

Source: Barchart 

 

Brazil’s real versus the U.S. dollar exchange rate moved from $0.18481 on Sept. 30 to a high of $0.19551 on Oct. 4 and was closer to the high at over the $0.191 level on Oct. 6.  

Polls Could Be Wrong Again 

EWZ and Brazil’s currency aren’t soaring, as the coming runoff points to a Lula victory, although EWZ has rallied since Sept. 29. However, another surprise that gives President Bolsonaro a second term could ignite a substantial rally as markets favor capitalism over socialism.  

The pollsters were wrong on Oct. 2, shedding considerable doubt on the Oct. 30 contest. Expect significant volatility in EWZ over the coming weeks as the path of Brazil’s economy is at stake in the upcoming election.  

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