Market Pulse

Research evidence excerpt

Market Pulse

Turning toward Brazil, readers know that we've had the view that President Luiz Inacio "Lula" da Silva would win the race for the

presidency this autumn, and that this would reverse the BRL's good fortunes created by the positive terms of trade shock from

higher crude oil prices. A Lula victory became likelier with yesterday's revelations about Senator Flávio Bolsonaro, Lula's

expected opponent from the populist and pro-market right. The quick version of the background is that Flávio Bolsonaro is

reported to have negotiated to obtain about BRL 134mn from Daniel Vorcaro, the former owner of Banco Master, who is subject

of a corruption scandal involving his business Ostensibly, the monies were intended to produce a film about Flávio's father, Jair

Bolsonaro, the former president. But the story highlights the premise that Vorcaro offered the funds for political favors.

We believe that the dynamics underlying the election could shift significantly from this point onward, particularly given

the public sensitivity toward corruption issues and the growing prominence of the Banco Master case in Brazil's media

coverage. For one, Lula is likely to intensify direct attacks against Flávio over the case in an effort to strengthen support for

his reelection campaign. Lula and Flávio Bolsonaro had been polling roughly equal in latest runoff surveys, so Lula did not have

a deficit to overcome before the stories broke yesterday. Secondly, the revelations detract from one of the few advantages

that Flávio Bolsonaro had heretofore had - that despite high disapproval ratings he was perceived as being less corrupt than his

father, or even Lula. As of this morning, the prediction market has seen the implied probability of Flávio Bolsonaro winning the