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

Brazilian President Luiz Inácio "Lula" da Silva's reelection on October 25 brought about a significant shift in Brazil's financial market, as evidenced by the Wall Street exchange-traded fund EWZ falling by 24%, with large-cap stocks experiencing losses of more than double digits. Major state-run companies such as Petrobras, Itaú, and Bradesco saw their stocks plummet, while NU Holding also declined by 21%. In response to the steep decline, the São Paulo Stock Exchange halted trading for a 30-minute period.

The repercussions of Lula's victory were felt across Argentina's financial landscape as well. Argentine bonds trading on Wall Street experienced a sharp drop, leading to an increase in the country's risk rating to a record high of 745 points, which had not been seen since the midterm elections of the previous year. American Depositary Receipts (ADRs) also faced significant losses, with Banco Supervielle, BBVA, and Telecom all experiencing declines of up to nearly 10%.

The Merval, the leading index of the Argentine stock exchange, dropped by 4.8% in its dollar-denominated measurement and 3.2% in Argentine pesos.

Economist Gustavo Ber noted that Lula's reelection could have positive implications for Argentina. Ber pointed out that Milei would retain regional leadership in comparison to US President Donald Trump, a fact that holds significant weight due to Milei's financial backing and influence in Latin America and on the international stage.

However, Ber also expressed concerns over the "adverse impact" of the electoral results on the valuation of Argentine assets, particularly the sharp decline in local bonds trading on Wall Street and the sinking of ADRs. The competitiveness of the Argentine peso against the Brazilian real, which had rapidly depreciated following strengthening post the first round of voting in early October, was another cause for concern.

This depreciation could make Argentine exports to Brazil more expensive, potentially leading to a loss of international investors and increased capital flight from Argentina, exacerbated by the closure of carry trade bets in Brazil and heightened tourism to Brazil. Ber emphasized that the response from President Javier Milei's economic team would be critical in mitigating the negative consequences of this currency devaluation.