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Brazil’s real and the Bovespa had a good week, as the market processed the fact that Flávio Bolsonaro is likely to be the country’s next president. The 5 October election delivered an unexpected 47.03% of the vote for Bolsonaro, against incumbent President Luiz Inácio Lula da Silva’s 45.16% in the first round, setting up a 25 October runoff. Bolsonaro’s Liberal Party (PL) also obtained strong results in Congressional and gubernatorial races.
Markets rallied strongly on expectations of tighter fiscal policy and a shift in economic management, pushing local yields roughly 150bps lower and strengthening the BRL by nearly 5%. Sugar and ethanol producer Raízen and peer FS Bioenergia are seen as a potential winners, as the market thinks Bolsonaro will scale back the support Petrobras provides to domestic fuel prices. That would leave room for higher gasoline prices and, in turn, firmer ethanol prices.
Independent oil operators could also benefit if Petrobras ends up selling assets, particularly if interest rates go down and environmental rules are relaxed. Lower rates could also benefit banks, but the likely pressure on Petrobras could end up hurting Braskemcreditors’ chances for a capital injection from the state-controlled oil company, which...
