The game of emotions and volatility in the markets is not over yet

Institutional crisis should continue to dominate the behavior of our currency — and all Brazilian assets — in the short term

Marcos Santos/USP ImagesIBGE released the IPCA for August, which recorded a 0.87% change in the month, above the ceiling of market projections

What more emotions do you have to come? Thinking that we will have presidential elections after a pandemic, I can’t say which ones, but they will. Last week could have been a movie, after all, in the demonstrations of September 7th, the president Jair Bolsonaro threatened the Federal Supreme Court (STF), in a tone considered undemocratic by much of the political world, and had to withdraw from his position just 48 hours later through a letter of pacification articulated by the former president Michel Temer after the scathing response from the STF minister, Luiz Fux. First of all, I wouldn’t count on Bolsonaro’s continuing this pacifying tone. Even given the strength of our democracy and institutions, still, government rhetoric is strong enough to shake markets when ignited.

Second, the economic situation has deteriorated a lot. Until a few months ago, the economic activity and its recovery were praised, which is not very strong, after all, market projections and expectations began to be constantly revised downwards. The general idea is that growth in 2021 will be high (about 5%), but on a very low basis, while for 2022 we expect our, which has already become almost traditional, growth of 1.5% to 2, 0%. Inflation is not even talked about, as we expect it to be double digits. Also last week, the IBGE released the IPCA for August, which registered a variation of 0.87% in the month, above the ceiling of market projections (which was 0.85%) and accumulated a 9.68% increase in the last 12 months. Despite inflationary pressure being more concentrated in regulated prices, such as electricity (because of the water crisis and the red flag) and fuel, the widespread increase in other groups continues to be observed, with emphasis on food and beverages and service prices.

In other words, the increase in inflation will continue to be a matter of concern for the central bank and an eventual increase in the rate of interest rate adjustment. By the way, here is the third point. The president of the Central Bank, Roberto Campos Neto, remains emphatic that he will take the rate Selic where necessary to contain inflation. And, my friends, in a short time we will be talking about the double-digit Selic rate, wait. And how should the market position itself? Well… it is worth mentioning that, even those who would benefit from an increase in interest rates, thinking of a fall in the exchange rate, this time it may be different. The institutional crisis should continue to dominate the behavior of our currency (and all Brazilian assets) in the short term. Warning, the game of emotions (or market volatility) is not over yet.

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