Brazil Markets: Despite Runoff, Rousseff Should Be First Female President

By Matt Theal  OCT 07, 2010 8:20 AM

Brazilian equity markets seem to like the prospect of the new president.


Late Sunday night it looked as if Dilma Rousseff was going to become the first female Brazilian president. However, to the shock of many, Brazilian elections officials said she failed to get enough votes and a second round was needed.

At the end of Sunday Dilma Rousseff had 46.8% of the vote and Jose Serra has 32.6% of the vote. In order to win the election Rouseff needed her vote total to exceed 50%. Because she came up short, a runoff election will now be held on October 31st. Supporters of Ms. Rouseff should not be worried, analysts believe she will have no problem getting the 50% vote in the second round against Mr. Serra.

The Brazilian equity market liked the result of the election as the Bovespa has rallied almost 3% since September 30th. In fact, capital flowing into Brazil has become such a problem that Brazil has increased its tax on foreign capital inflows.

Finance minister Guido Mantega said Brazil was increasing the financial transaction tax to 4% from 2% on money that was entering the country to invest in fixed income instruments. Brazil is doing this because it believes the measure will prevent further appreciation of the real. Note that the measure does not affect money entering Brazil that invests in equities or as foreign direct investment.

The main reason Brazil is imposing this tax is because investors have been taking advantage of the carry trade. The spread between the interest paid on Brazilian government debt (at least 10.75%) and the cost of borrowing overseas is about almost half a percentage point a year. Therefore, savvy investors can use complex derivative instruments that take advantage of the spear.

Finally, in the strangest news of the week, Brazil has elected an illiterate clown to Congress. Yes, I’m being serious; the Brazilian people have actually elected a clown, like Bozo, to Congress. The clown’s real name is Francisco Everardo Oliveira Silva, better known as Tiririca, which means grumpy. He received more than 1.3 million votes in Sao Paulo. It was more than double the votes of the second place candidate.

His slogan was, ”What does a congressman do? The truth is I don't know, but vote for me and I'll tell you.”

Further Reading:

The head of Gerdau (GGB) backs the US government investigation into Anshan Iron and Steel.

Gabriel Gaspar on the future of Brazil.

Brazil’s currency war is hurting no one.

Petrobras (PBR) falls after a Barclay’s note said another share offering could be coming.

No positions in stocks mentioned.

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