Brazilian stock market surges on election expectations

The benchmark stock index Bovespa in Brazil witnessed a strong rebound. The opening price of the index quickly broke through the 8% mark. During the trading session, buying funds continuously poured in, driving the index to steadily climb. Finally, the index reached 205,000 points. This one-way upward trend is extremely rare in the recent market.

Market trading was extremely active. The trading volume in the first half hour of the morning session set a new high in recent times. Market panic was completely eliminated, and risk appetite sharply rebounded. The MACD indicator formed a golden cross above the zero axis. The KDJ indicator rose rapidly. The index appeared to be breaking out upwards clearly.

The share prices of exchange operator B3 and loan institution BTG Pactual both soared. The gains of these two stocks exceeded 20%. The surge in financial stocks, the expansion of credit, and the increased activity in the capital market. As an exchange operator, B3 directly benefited from the huge increase in stock trading volume. The share price of retailer Magazine Luiz also rose by more than 20%.

The funds are optimistic about the prospects of Brazil's domestic economic recovery. The lead of the right-wing candidate has eased market fears of aggressive economic policies. The consumer confidence has been improved and the profit expectation of the retail enterprises has been accordingly raised substantially. BTG Pactual is a well-known lending institution and its asset quality should improve in the economic recovery.

In contrast, some export-oriented enterprises have had capital outflows, whereas financial consumer stocks have been booming. The share price of pulp manufacturer Suzano dropped by 8.5%. Investors were worried about potential changes in the exchange rate and trade environment brought about by right-wing policies. The profit margins of export enterprises might be squeezed. The signs of capital flight in this sector were very obvious.

Commodities and export-oriented stocks are usually highly sensitive to exchange rate fluctuations. The expectation of right-wing policies may lead to large fluctuations in the domestic currency exchange rate. Suzano and other pulp companies have a relatively high proportion of overseas revenue. An appreciation of the domestic currency will weaken the price competitiveness of their export products. Funds adjust their positions in advance to avoid potential exchange loss risks.

The core reason for the recent sharp rise in the stock market is the lead of the right-wing candidate Flavio Bolsonaro, which has given the market hope for the restoration of fiscal discipline. The expansionary fiscal policy during the left-wing government period had raised concerns about inflation. Investors have reassessed Brazil's sovereign credit risk on hopes a right-wing government will come to power. The decline in the national risk premium has enhanced the attractiveness of the stock market.

Fiscal austerity and privatization progress are expected to improve the business profit environment. The easing of inflationary pressure also opens up space for the central bank to cut interest rates in the future. The low interest rate environment will further reduce the financing costs for enterprises. This positive macroeconomic expectation supports the significant rise in the index.

Although the single-day increase in the index was astonishing, investors still need to remain cautious. The results of the first round of elections are only preliminary signals. The final presidential candidate still needs to wait for the second round of voting. The variables of political games still exist. After the market digests the initial positive news, it may face pressure from profit-taking. If the subsequent election data are not up to expectations, the stock market may face severe fluctuations.