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The Calm Before The Storm?

20 August 2018 by jbchevrel

BRAZIL is wider just +4bp today, a move that is certainly not impressive, compared to its neighbor ARGENT (+15) or even TURKEY (+13). Similarly, BRAZIL has widened ‘only’ c60bp since mid-May, vs c250bp for TURKEY and c200bp for ARGENT. However, it is worth noting that the sentiment on Brazil is at risk, due to the coming general election in October. Indeed, the latest polls show that the Workers Party (‘PT’) is dominating with more than 37% of the votes. This party has lost investors’ confidence after Lula’s/Rousseff’s corruption scandals, which largely helped pushing the country into a two-year-long recession in 2014-16. Oppositely, the candidate felt as more market-friendly (namely Geraldo Alckmin) failed to gain in popularity, still below 5% of the votes, which makes him look non-eligible for the runoff. $BRL is at the highest in more than two years (just below 4.00), but as we are less than 50 days before the 1st round (Oct 7), it is fair to say that concerns over Brazil may grow by then. Some analysts (incl. BAML) forecast above-5 $BRL if the PT takes power again, especially as positioning looks light. The FX/CDS correlation is at the low end of the five-year range (<50%) and may reassert in case of stress, if recent history (2015/16) is any guide. Elsewhere it was a quiet session, CDS indices traded in tight ranges. Main/IG spread tightened back from 10bp+, as European stocks outperformed their US counterparts (SX5E +0.6% SPX +0.2%).