In recent weeks, fiscal worries have once more taken precedence over global influences in shaping Brazil's market sentiment. Speculation about potential new stimulus measures intended to enhance government popularity has rekindled investor apprehension regarding the nation's fiscal future. This shift has led to a marked increase in market volatility, affecting both exchange rates and interest rate futures. Notably, reports indicating possible expansions in fiscal strategies caused the Brazilian real to depreciate significantly, while yields on interest rate futures surged substantially—a level of domestic turbulence not witnessed since late 2024.
Market Turbulence Amid Fiscal Uncertainty
Amidst the golden hues of autumn, Brazil finds itself at a crossroads as fiscal concerns overshadow global dynamics. In recent days, whispers of impending stimulus measures to bolster governmental favor ahead of the Bimonthly Revenue and Expenditure Report have unsettled investors. The resultant spike in market volatility has been palpable, with significant impacts on currency values and interest rate futures.
On Thursday, rumors of expanded fiscal initiatives sent shockwaves through the markets. The Brazilian real plummeted by over 1%, reaching its lowest point during the session, while interest rate futures saw an unprecedented rise of up to 15 basis points. These fluctuations mirror the political and economic turmoil experienced in late 2024, underscoring the current unease.
Victor Scalet, macro strategist at XP Investimentos, observed that since the announcement of trade tariffs by Donald Trump, local news had been overshadowed by global developments. However, with idiosyncratic risks mounting, attention is shifting back to domestic factors. Scalet noted an unusual surge in inquiries from foreign clients regarding Brazil’s election cycle, fiscal risks, and inflation trajectory.
Olga Yangol, head of emerging markets research at Crédit Agricole, expressed caution about betting on declining interest rates in Brazil. Her team forecasts a Selic rate of 13% for the end of next year, a stance more hawkish than market consensus. She finds neither the front nor long end of the yield curve particularly appealing due to prevailing fiscal concerns.
Carlos Kawall, former Treasury secretary and now director at Oriz Partners, highlighted the challenges facing Brazil. Initiatives like raising the income tax exemption threshold and introducing a new private payroll-deductible loan system suggest a slower economic cooling. Speculation about additional credit and fiscal stimuli further complicates the outlook.
All eyes are on Thursday's fiscal report, anticipated to outline a spending freeze ranging from R$5 billion to R$10 billion. Analysts at TS Lombard believe any figure above R$20 billion would be seen positively by markets. However, downside risks remain if the fiscal response is underwhelming, potentially reversing recent gains.
Emy Shayo Cherman, equity strategist at J.P. Morgan, emphasized that Brazil's strong market performance in 2025 stems largely from global rather than domestic factors. While acknowledging benefits from shifts in global dynamics, she warns of looming local catalysts—interest rate easing and the upcoming election race—that could reshape the narrative.
From a journalistic perspective, this unfolding drama in Brazil underscores the delicate balance between fiscal responsibility and political expediency. As the country navigates these turbulent waters, it serves as a reminder of the intricate interplay between economic policy and market sentiment. Investors must remain vigilant, understanding that while global momentum can buoy markets temporarily, sustainable growth hinges on addressing underlying fiscal vulnerabilities.