Brazil markets to see fresh volatility after Bolsonaro supporters storm capital

MEXICO CITY/SAO PAULO  -Brazilian assets face fresh volatility on Monday after supporters of former President Jair Bolsonaro stormed key government buildings, echoing the U.S. Jan. 6 insurrection of 2021, analysts said.

Images of the coordinated invasion on Sunday afternoon, which overwhelmed law enforcement and left the Supreme Court building and other locations with severe internal damage, shocked onlookers, including many from the financial industry.

Ricardo Lacerda, founder and CEO of Brazilian investment bank BR Partners, said he expects markets to react with volatility in the short term, especially on Monday, given the higher institutional risk. “The end of polarization seems to be far and may drain the new government’s energy,” Lacerda said.

A European-listed iShares MSCI Brazil ETF slipped 2.4 percent in early trade on Monday. U.S.-listed shares of Petrobras and Vale fell in pre-market trade.

Brazil’s real currency and benchmark Bovespa stock index, which outperformed other emerging markets in Latin America during most of 2022, had already been hit by turbulence in the first few days after leftist President Luis Inacio Lula da Silva’s Jan. 1 inauguration on concern about increased government spending.

On Friday, both had performed better after Lula said the country may grow while keeping government finances in check.

Still, some analysts said any negative market reaction to the latest events could be temporary. “Given that the situation seems to be under control in Brasilia, I would expect any asset class impact to be short-lived,” said Alejo Czerwonko, CIO for Emerging Markets Americas at UBS Global Wealth Management.

Emy Shayo Cherman, Latin America and Brazil equity strategist at JPMorgan, agreed but added the political impact could be more prolonged as Sunday’s disruption should embolden Lula.

“As the president gets stronger and the opposition weaker, one could see a greater radicalization from the left, perhaps pushing the agenda further than one would think,” Cherman said.

Carlos Eduardo Furlanetti, professor at FIA Business School, expects a strong reaction from institutions including Congress and the Supreme Court, supporting the president which may help Lula’s government politically in the medium term.

Bruno Komura, analyst at asset manager Ouro Preto, expects a negative initial reaction in markets, with interest rates rising and currency and stocks falling, though the strong institutional reaction could help assets to recover by the end of the week.

Carla Argenta, chief economist at CM Capital, points out that the Brazilian rioters were helped by lenient law enforcement in Brasilia, something that didn’t happen in the U.S. Capitol and that adds to the perception of political risk in the country. However, that may be reversed if the institutions show unity against the rioters, she added.

The violence laid bare a sharp division within society, said Enrico Cozzolino, partner at asset manager Levante Investimentos. “We have seen the lack of consensus since the impeachment of former President Dilma Rousseff.”

While large sections of the Brazilian banking industry have tended to back Bolsonaro given his free market credentials relative to Lula’s Workers’ Party, the sector’s main industry association roundly condemned Sunday’s violence. Isaac Sidney, head of banking industry group Febraban, called for “firm reaction” against Sunday’s unrest.

“I think the situation will quickly normalize,” said Cristian Maggio, head of portfolio strategy at TD Securities in London. “Yet, it is an event worth keeping an eye on, as it may not be fully over just yet.”