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Six Weeks

23 August 2018 by jbchevrel

BRAZIL continued to widen today (+7bp), Lula polling 37%/39% recently, just six weeks before the General Election (1st round Oct 7 / 2nd round Oct 28). According to a law that he signed himself when he was still in office, Lula cannot take back power less than eight years after he finishes to serve his sentence (which he is still serving). One can imagine that the courts may overturn that ruling if he runs and wins, so the main question here is probably whether he can run, because if he runs, he will likely secure 35% while if his VP Haddad runs, he’s seen at only c13%. We will know by Sep 17th the latest. Many people ask whether BRAZIL is the new TURKEY, the answer is probably not, because its external position is more solid. That said, there risk on the upside on the CDS, which is now close to the YTD wide (now 270bp vs 282bp). Open Interest is decent (c$16.5B / biggest in EM), according to ICE clearing data which you can monitor on OTCStreaming. ARGENT (+10) is also wider in sympathy, 5y CDS is now back at 600bp. Elsewhere in EM, RUSSIA (+2) pared widening on RUB 2% sudden rally in London AM on CBR declaring it won’t buy FX on domestic market until end-SEP. SOAF (+6) widened up to 10bp and $ZAR rose up to c2% in London AM on the back of Trump's tweet that he's asked Pompeo to closely study the seizures/expropriations. It was a totally different story in Asia, where CHINA is still close to tights (<60bp) despite non-convincing trade talks.