Brazil: Financial markets underestimating risks - Rabobank

General elections in Brazil will take place on Sunday. According to analysts from Rabobank, financial markets are underestimating rising risks for the execution of key reforms next year. 

Key Quotes: 

“In the ending week, Brazilian assets (e.g. CDS, BRL, equities, nominal rates) rallied and outperformed peers in general, as the electoral surveys and political speeches are (surprisingly) making investors embrace optimistic scenarios for economic policy and reforms.”

“We still sense financial markets are underestimating what we see as mounting risks for the execution of key reforms in 2019 – pre-condition for sustained recovery, macro stability. This probably comes on the back of a respite in the global EM rout, paving the way for some market participants to downplay (the rising) risks.

“The first round of general elections will take place on Sunday (October 7th), and the surveys for the presidential race point to a possible run-off between Jair Bolsonaro (PSL) and Fernando Haddad (PT) in the second round, confirming a possible right-left polarization.

“On the economic front, consumer prices shower benign figures and composition in September, despite the mounting risks from the weaker FX. Core inflation remains at low levels, reflecting wide economic slacks, anchored inflation expectations.”

“Activity indicators, such as this week’s August industrial production (IP) remain in a gradual recovery mode.”