Markets in Brazil React Favorably to Lula Conviction

By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The announcement of a nine and a half year jail term for former president, Luiz Inácio Lula da Silva stirred financial markets on Wednesday, with the U.S. dollar plummeting against the Brazilian real in the foreign exchange market and the São Paulo Stock Exchange skyrocketing.

The financial markets started to react minutes after the announcement that federal judge Sergio Moro had sentenced the former president to almost ten years in jail for passive corruption and money-laundering. Former President Lula was found the guilty of accepting US$1.2 billion in bribes from engineering firm OAS in exchange for his help in winning contracts from state oil company, Petrobras.

The U.S. dollar, in its fourth consecutive day of depreciation against the Brazilian real, took a dive after the announcement, dipping below R$3.21/US$1 to close the day at R$3,208/US$1, the lowest value in almost two months.

The Bovespa Index at the São Paulo Stock Exchange soared after judge Moro’s ruling closing up by 1.57 percent at 64,836 points. This was the highest level for the index since May 17th.

And despite the major political turmoil caused by the verdict, which will almost certainly make Lula ineligible for the 2018 presidential race, Neil Shearing, Chief Emerging Markets Economist at Capital Economics, says that in the financial realm the Brazilian market should register even more gains in the coming days.

“Given that a Lula victory would quash any hopes of much-needed economic and fiscal reforms, this would have been market-negative. It follows that today’s ruling is likely to give a boost to Brazilian markets. Expect the real to strengthen and long-dated local currency bond yields to drop over the next 24 hours,” Shearing said in an email to investors.