Brazilian markets crash following Lula’s reelection. What’s the impact in Argentina?

The reelection of current Brazilian President Luiz Inácio “Lula” da Silva, who defeated Flávio Bolsonaro in the October 25 runoff, triggered a schism in Brazil’s financial market on Monday. 

The EWZ, a Wall Street exchange-traded fund that groups the most important mid- and large-cap companies on the Brazilian stock exchange, plummeted 24%.

Large-cap stocks are showing losses that easily exceed double digits. 

The most representative cases were state-run oil company Petrobras (-15%), banks Itaú (-22%) and Bradesco (-30%), as well as NU Holding, dropping 21%. 

The drop was such that the São Paulo Stock Exchange decided to suspend trading for 30 minutes following a decline of more than 10% in the Bovespa, the stock index that groups the 100 most important companies listed on the Brazilian exchange.

The current president’s reelection also triggered negative reactions in the Argentine financial market. Among them was the fall of bonds trading on Wall Street, which caused the country risk to soar. 

For financial markets economist Gustavo Ber, however, Lula’s victory would also have “positive effects for Argentina.”

Among the most notable facts, Ber mentioned that Milei “would retain regional leadership” vis-à-vis US President Donald Trump, a “relevant” fact due to the financial backing received and the influence that this bond grants him in Latin America and on the international stage.

Impact on Argetine markets Ber mentioned the “adverse impact” the electoral results had on the valuation of Argentine assets. 

Local bonds trading on Wall Street are falling sharply. Because of this, the country risk soared to 745 points, its highest level since last year’s midterm elections. 

As for American Depositary Receipts (ADRs), they are sinking by up to nearly 10% on Wall Street. The main ones are Banco Supervielle with 9%, followed by BBVA with 8%, and finally, Telecom with 8%.

Meanwhile, the Merval — the leading index of the Argentine stock exchange — is retreating 4.8% in its dollar-denominated measurement and 3.2% in Argentine pesos. 

The competitiveness problem For Ber, another negative factor is the “deterioration of the Argentine peso’s competitiveness” against the Brazilian real, which depreciated rapidly after strengthening following the first round of voting in early October.

“This not only makes Argentine exports to Brazil, its main trading partner, more expensive, but it could also trigger the exit of international investors,” Ber explained.

He added that this capital flight would be “fueled” by the closing of “carry trade” bets in Brazil. There could also be a greater outflow of foreign currency from Argentina “as a result of increased tourism to Brazil.”

Analysts from brokerage Portfolio Personal Inversores (PPI) said that the response from President Javier Milei’s economic staff “will be decisive” in addressing that loss of competitiveness. 

“The depreciation of the real introduces a headwind for the peso, so it will be important to observe whether the government allows any eventual selling pressure to translate into a rise in the dollar or if it intervenes again to contain it,” they said.

Cover image: Rafael Minguet Delgado/Pexels