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BrazilGIPModelBrazilChamberofDeputiesBolsonaro Optimism Likely Reaching Its Crescendo (10/29): Jair Bolsonaro’s victory in the 2nd round runoff for Brazil’s presidential election has been met with incremental buying pressure, though both the BZA and BRL are now trading well off their initial highs of 90,375 and 3.5864, respectively, as investors begin to actually digest the likely path of policy going forward. Recall that we’ve been in the camp that meaningful fiscal reform was largely a pipe dream given the composition of Brazilian Congress – which, after the recent elections, remains as fragmented as ever. Specifically, pro-market parties like Bolsonaro’s PSL and PSDB now hold 131 (of a total 513) seats across seven parties in Brazil’s Chamber of Deputies, up +23 seats from the previous Congress. That compares to 247 seats (↓ -36) for centrist legislators across 18 parties and Independents and 135 seats (↑ +13) for statist parties like the PT and PSB. Investors should be aware that Bolsonaro’s victory was more of a repudiation of the corrupt PT – which lost the presidential race for the first time in 20 years – than it was for his liberal economic proposals; a third of Brazilians abstained from voting – the highest level since 1989. “We are going to accelerate privatizations,” Bolsonaro’s economic advisor Paulo Guedes said publicly, only to be subsequently undermined by Bolsonaro’s decision to rule out privatizing the core operations of oil giant Petrobras, as well as the generation units of state power utility Eletrobras. With Brazil’s Unemployment Rate at a structurally elevated level of 12.2% as of 3Q18 (it was as low as 4.6% as of 4Q14), we can’t see how the kinds of austerity measures investors are hoping for are going to fly politically – especially in the context of a persistent #Quad3 economic backdrop through 1H19E. Speaking of hope: Citigroup, UBS, and Banco Bradesco are out this morning with 104,000 (+20% from last price), 119,000 (+37%), and 120,000 (+38%) price targets on the Bovespa Index by YE ’18, mid-2019, and late-2019, respectively. We haven’t received full confirmation of upside capitulation in our derivatives market analysis just yet, but to the extent we do receive it tonight’s volatility data and in Friday’s CFTC report (data through tomorrow’s close), we’ll be looking to reestablish EWZ shorts.



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