Bolsonaro wins the 1st round in Brazil: watch these 5 markets!

Summary:

• No winner surfaced from the first round of the Brazilian presidential elections

• However, Bolsonaro smashed Haddad 46 to 29%, suggesting a likely win in a run-off

• Second round of voting scheduled for October 28

• USDBRL just above the key 3.70 levels, soft commodities rely on performance of this currency pair

• Bolsonaro could be BRL-friendly with consequences for soybean, coffee and sugar

The general elections in Brazil was a major source of uncertainty on some markets in the past months. As no candidate managed to secure over 50% of votes in the presidential elections during the first round this uncertainty is to prevail during the next three weeks. The second round of voting will be held on October 28. In this analysis we take a look at five markets most impacted by the situation in Brazil.

USDBRL

The Brazilian real took a beating this year on the back of rout that stormed through EM markets being additionally under pressure from domestic political issues, namely the general elections. The Brazilian currency depreciated almost a quarter against the US dollar from the beginning of the year to mid-September. The currency managed to recoup some losses in the past three weeks and is now trading at around -17% YTD against the USD. In the run up to the second round of the elections BRL traders should pay double attention to incoming news and opinion polls as the two candidates that will clash on October 28 are strikingly different and even minor advantage of one of them in the polls may impact the valuation of BRL. Importantly, USDBRL has reversed from 2015 and 2016 highs so traders can hope for a major break lower, with the 3.70 now being the key level to watch.

USDBRL pulled back in the run up to the first round of the presidential elections. A victory of the market-friendly candidate could allow the pair to test support zone in the vicinity of 3.70 handle. Notice that this area coincides with the 50% retracement level of the major upward impulse started at the beginning of the year. Source: xStation5

BRAComp

Jair Bolsonaro, a candidate of the Social Liberal Party and former Army captain, won the first round of the elections securing 46% of votes. In the second round he will face Fernando Haddad, a candidate of the Workers’ Party, who won backing of slightly below 30%. Despite his professed ignorance of economics Bolsonaro is favoured by the markets as he said he will delegate economic policy making to Paulo Guedes, the Brazilian economist. Guedes is viewed as a supporter of privatization, lowering tax burden and boosting central bank’s independence. Haddad holds the PhD in philosophy and university degree in economics but his Workers’ Party is a vivid opponent of selling state-owned entities and a harsh critic of banks seeking to levy additional taxes on the sector. Moreover, he pledged to revoke constitutional cap on the government spending and undo market-friendly reforms of the current President Michel Temer. BRAComp has been in a correction ahead of the elections, so a pick of a market friendly candidate will be crucial for the buyers.

BRAComp (Ibovespa futures underlying) was subject to some hectic moves in the months prior to the elections. The benchmark began to move higher as support for Bolsonaro, the candidate viewed as market-friendly, started to rise. In case this attitude is to prevail and Bolsonaro will succeed in the second round the index may storm ATH around 89200 pts handle. Source: xStation5

Soybean

Brazil is the World’s biggest soybean exporter therefore one can easily guess that the outcome of elections will weigh on prices of this commodity as well. However, it should be noted that when speaking of soybean prices usually the US prices are meant. In the wake of trade conflict between China and the United States the Brazilian soybean trades at premium to its US counterpart. This spread was widening following the announcement of tariffs on the US soybeans and has recently reached the scale that is said to reflect the actual impact of trade war. Having said that, in case BRL appreciates following the outcome of presidential elections Brazilian soybean will be more expensive to buyers and the US soybean prices are likely to do the same as further widening of spread between US and Brazilian soybean prices would be unjustified.

Trade conflict between the United States and China is definitely issue that impacted SOYBEAN prices the most this year. However, a BRL-positive outcome of the second round of presidential elections may boost Brazilian soybean prices and therefore exert an upward pressure on the soybean prices in the US. In such case the resistance zone ranging above 900 handle could be a level to watch. Source: xStation5

Coffee

While soybean prices definitely have potential to be impacted by the outcome of the elections there is one commodity that will be impacted surely - coffee. Brazil is the biggest coffee producer in the World accounting for as much as 35% of the global output. There is a clear correlation between coffee prices and the Brazilian real performance. Both took a hit this year and both began moving higher dozen or so days ago. Just as in the case of soybean coffee prices may jump higher in case we see BRL gaining ground. However, unlike in the case of soybean impact will be much more direct on the coffee market.

After trading in the consolidation range at the beginning of the year COFFEE prices broke lower and started to move in a downward channel. However, recent bounce higher in BRL support coffee prices and allowed them to break above the aforementioned price channel. The resistance zone around 115 handle could be viewed as potential stop for bulls in near term, especially as it is additionally strengthened by the 200-session moving average. Source: xStation5

Sugar

When it comes to sugar the situation is quite similar to coffee as Brazil is the World’s largest producer that accounted for almost 22% of the global output in 2016/17 season. Having said that, sugar prices are set to rise with appreciating BRL. Additionally, high oil prices boost outlook for sugar prices. Sugarcane is used in the production of biofuels and biofuels are extensively used in Brazil. Therefore high oil prices encourage increasing biofuel production and in turn the supply of sugarcane used for the production of sugar is limited. Limited supply of production inputs will result in smaller production, what in theory should boost sugar prices.

Comparing SUGAR chart with USDBRL (inverted, blue overlay chart) we can see that latest appreciation of the Brazilian real was followed by rise in the sugar prices. The commodity is notw testing the price zone ranging 12.75-13.00. Note that this zone served as floor for price in the second half of the 2017 and in the first quarter of 2018. Source: xStation5