October 8, 2018 / 8:10 PM / a year ago

EMERGING MARKETS-Brazil's real, stocks climb on election optimism

    Oct 8 (Reuters) - Brazil's real firmed more than 2 percent
on Monday and stocks were on track to mark their highest close
in nearly five months, after a strong first-round showing for
far-right presidential candidate Jair Bolsonaro raised hopes for
much needed economic reforms.
    Bolsonaro trounced expectations by winning 46 percent of the
votes on Sunday - 17 percentage points more than main rival,
leftist Fernando Haddad.
    Investors overwhelmingly prefer Bolsonaro as they believe
that he will tackle the cost of Brazil's pension system and its
rising debt load with the help of University of Chicago-trained
economic adviser Paulo Guedes.
    "Bolsonaro's larger-than-expected victory should enhance his
political capital, increasing the likelihood that, should he get
elected, he will be able to negotiate a working majority in
Congress...increasing the chance that his fiscal austerity
measures will be approved," ING said in a note.
    But, given the gains accumulated on election optimism by the
real and stocks, market watchers warn of the rally's lack of
sustainability. With most polls last week showing a win for
Bolsonaro in the first-round, the currency had added 5.4 percent
on the week, and the stock market 3.8 percent.  
    Further more, "power within Congress is now going to be
split amongst a larger number of parties. This is going to make
the horse trading that is part and parcel of Brazilian politics
more difficult," said Edwin Gutierrez, Head of Emerging Market
Sovereign Debt at Aberdeen Standard Investments.
    "While Brazil has undergone a big shift in terms of party
politics, nothing has changed the patronage system, which
Bolsonaro is going to have to master very quickly to advance his
agenda," Gutierrez added.
    The real rose for a sixth straight day, and the
benchmark stock index was 4.4 percent higher led by
gains in state-run power companies Eletrobras and
Cemig which added more than 17 percent each.
    Bolsonaro has said he would proceed with plans to privatize
Eletrobras. Cemig, a utility for the state of Minas Gerais, was
lifted by similar hopes as two market-friendly candidates
advanced to the second round of the election.
    State-controlled oil company Petrobras surged
nearly 11 percent and was the biggest point contributor to the
Bovespa's rally, as concern eased about a potential win for
Haddad, whose Workers Party had threatened to interfere in the
company's management.
    Stocks in Buenos Aires' Merval index also rose, with
local shares of Brazil's state-run oil firm Petrobras
leading gains with a more than 10 percent rise.
    The peso rose for a fifth session in six, buoyed by
central banks sale of short-term notes at uber high rates. 
    Meanwhile, Mexico's currency declined as the dollar
gained on worries on Italy's budget. Stocks on Mexico City's IPC
 tracked a slump in global equities led by Chinese stocks
on rising fears of the Sino-U.S. trade war.  
    Key Latin American stock indexes and currencies at 1928 GMT:
 Stock indexes                         Daily %  YTD % change
 MSCI Emerging Markets        1000.76    -0.95        -13.61
 MSCI LatAm                   2632.96    -0.19          -6.9
 Brazil Bovespa              86259.15     4.78         12.90
 Mexico IPC                  48092.99     0.08         -2.56
 Chile IPSA                   5326.49     1.26          1.26
 Argentina MerVal            30641.79     1.57          1.92
 Colombia IGBC               12448.25     0.16          9.48
 Currencies                            Daily %  YTD % change
 Brazil real                   3.7578     2.62        -11.83
 Mexico peso                  18.9115    -0.49          4.16
 Chile peso                     681.8    -0.67         -9.85
 Colombia peso                3043.38    -0.45         -2.02
 Peru sol                       3.324     0.00         -2.62
 Argentina peso (interbank)   37.4000     1.34        -50.27
 Argentina peso (parallel)       37.5     1.33        -48.72

 (Reporting by Susan Mathew in Bengaluru;
Editing by Alistair Bell)
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