Brazilian elections kick off, markets closely monitor fiscal outlook

(1) Brazil will hold elections on Sunday, and the results will show whether the largest economy in Latin America will follow the regional right-wing shift trend or continue on its own path. (2) Left-wing President Lula is expected to lead by a small margin in the first round of voting, but is unlikely to win outright and may enter a runoff on October 25. (3) His most likely opponent is Flavio Bolsonaro, son of former President Bolsonaro. (4) For investors, the election outcome is of great significance: Brazil’s high interest rates have made the real a popular carry trade target, while households and businesses are under pressure and concerns about economic growth are rising. (5) No matter who wins, the next president will face tough fiscal challenges, and the market worries that Brazil’s debt burden may not move towards a more sustainable path. (6) Attention will next focus on the direction of the runoff and whether the new government can present a credible fiscal consolidation plan, which may affect the performance of the real and Brazilian assets.