Bolsonaro wins in Brazil, Chinese stocks tank again

Summary:

• Jair Bolsonaro wins in the run-off of presidential elections in Brazil

• Chinese stocks extend their slide

• Euro goes nowhere despite a regional election in the state of Hesse (Germany) and a S&P’s decision on Italian credit rating

Jair Bolsonaro claimed a victory in the run-off of presidential elections in Brazil taking place on Sunday. He managed to beat his rival Fernando Haddad reaching as much as 55.1% of votes (99% of votes have been counted thus far). Note that the fallout is not particularly surprising as he was expected to win given that all polls conducted after the first round of the elections pointed to him. In a speech after the elections’ results were published Bolsonaro’s top economic adviser said that the new administration will try to erased a budget deficit within a year while a pension reform is the top priority. The Bolsonaro’s presidency is to be also aimed at cutting payroll taxes (they are expected to generate up to 10 million jobs) as much as simplifying other taxes. On top of that, he promises to overhaul regulations with regard to infrastructure investments. The Brazilian real rallied against the US dollar on Friday closing at the highest level since May. Over recent several weeks both the BRL and the country’s stock market have wiped off their prior losses fuelled by rising uncertainty over the presidential elections. What to expect now? Even as the real could open higher later today in response to the elections’ results its further performance will be undoubtedly more dependent on real changes implemented in Brazil helping the South American economy to restore confidence. Therefore, a profit-taking wave could be on the cards whereas all investors being interested in putting their money there should look forward to seeing real steps undertaken by the new president.

Technically the pair could be in a position to continue falling but the shrinking rate differential between BRL and USD could hold the former back. The first support could be found nearby 3.54. Source: xStation5

Looking elsewhere one may notice that Chinese equities have not had a good start to the new trading week to say the least. The Shanghai Composite is driving more than 2.4% lower while the Hang Seng (CHNComp) is falling 1.2% as of 7:24 am BST. The NIKKEI (JAP225) closed 0.2% lower while the Australian stock market ended the day with a 1.1% gain. When it comes to the news coming from Asia it is worth mentioning remarks from the Chinese Ministry of Commerce saying that it plans to impose an anti-dumping tax on some chemicals flowing from companies based in the United States, Saudi Arabia, Malaysia and Thailand. It listed seven different anti-dumping tax rates ranging from 10.1% to 97.1%. The new duties will take effect from October 30. This is the step which will affect consumers and producers using up these chemicals in some production processes.

The Hang Seng seems to be on the brink of an extended slide trying to settle in above 10000 points. Once this level is finally broken the price could fall even toward 9100 points where a more notable support line could be localized. A lot will depend on Wall Steet’s performance at the beginning of the week. Source: xStation5

On the FX front we are seeing relative calmness across G10 currencies. The euro is trading marginally higher at the time of writing playing down a regional election in Hesse, Germany and a decision of the S&P rating agency regarding Italy. As far as the first topic is concerned, the Merkel’s CDU won only 27% of the vote in the regional election, down from over 38% reached in the last election in 2013. The SPD came off second best gaining roughly 20%, also a substantial decline compared to 31% in 2013. The Greens made a significant increase compared to the last election achieving 19.5%, up more than 8 percentage points in comparison to the 2013’s vote. Despite clear worse results CDU and SPD should be able to keep working in a coalition quieting fears of an imminent collapse of cooperation. In turn, the S&P chose to keep the Italian credit rating at BBB cutting its outlook to negative from stable. The agency wrote in a note that “the negative outlook reflects the risk that the government’s decision to further increase public borrowing - besides exacerbating Italy’s already weak budgetary positions - will stifle the incipient recovery of the private sector.”

A move toward 1.13 should be taken into consideration given the fact the pair failed to come back above the 50% retracement last week. Source: xStation5

In the other news:

• The US Representative Kevin Brady said on Friday that the additional 10% middle class tax cuts would be a priority next year if the GOP keeps control of both chambers

• Mexican peso drops 1.7% after Mexicans voted to scrap a project to build a new airport in the country’s capital; the project is more than a third of the way to completion

• Japanese retail sales increased 2.1% YoY in September matching expectations