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

The reelection of Brazilian President Luiz Inácio "Lula" da Silva, who defeated Flávio Bolsonaro in the October 25 runoff, sent shockwaves through Brazil's financial market on Monday. The EWZ, a Wall Street exchange-traded fund tracking the performance of major Brazilian companies, dropped 24%. Sectors such as Petrobras, Itaú, and Bradesco experienced losses of over 20%, leading the São Paulo Stock Exchange to suspend trading for 30 minutes following a 10% decline in the Bovespa index.

The election outcome also had a significant impact on Argentina's financial market. Argentine bonds trading on Wall Street experienced a sharp decline, causing the country's risk rating to surge to its highest level since the mid-term elections of the previous year. American Depositary Receipts (ADRs) in Argentine companies were down by nearly 10%. The Merval, the leading index of the Argentine stock exchange, fell by 4.8% in dollar terms and 3.2% in Argentine pesos.

Economist Gustavo Ber noted that while Lula's victory could have positive implications for Argentina, the electoral results had an adverse effect on the valuation of Argentine assets. The depreciation of the Argentine peso against the Brazilian real, which accelerated following the first round of voting, made Argentine exports to Brazil more expensive.

This, in turn, could deter international investors and lead to capital flight, particularly due to the closure of carry trade bets in Brazil. Additionally, increased tourism to Brazil might contribute to a greater outflow of foreign currency from Argentina.

Ber emphasized that the response of President Javier Milei's economic team would be crucial in addressing the loss of competitiveness caused by the peso's depreciation. Analysts from brokerage Portfolio Personal Inversores (PPI) suggested that the government should consider intervening to contain any selling pressure and prevent the dollar from rising further.