The Long View

The football is over, and alas, to the disappointment - not surprise - of some of us, Spain and Argentina emerged victorious in the Euros and Copa America respectively. The weekend not only had football finales, but also an assassination attempt on former president Donald Trump, while he was speaking at a rally in Pennsylvania. The?US has a long history of political violence, with multiple successful assassinations of presidents as well as numerous attempted killings of both sitting presidents and presidential candidates, although, it has been awhile - 1981 Ronald Reagan - since we have seen this. The short term market impact is minimal, as this is not a 'market event', however if there is more widespread violence it could certainly derail global markets and strengthen the USD, weakening emerging market currencies.

The conclusion we would draw so far, is that this event will strengthen Trump in the short term, as his base will likely be even more motivated to turn up and vote in November - this should be reflected in polling this week, whereas Biden voters are likely in a state of flux. Recent polling suggests that both candidates are within two to three points of each other, however, after the recent debate and the events on Saturday, there is momentum for Trump. While most people have rightly condemned this act, it is unlikely that the polarization in the US will decrease, it may even become more unstable.?

From a Brazil perspective, if we are to believe that Trump's chances of winning the election have now increased, what may happen to the USD/BRL? There is no love lost between Trump and Lula, so if tariffs are implemented, Brazil exports to the US will get more expensive. Tax cuts, tariffs and more debt spending will certainly pressure inflation and will not make it easy for the US central bank to cut interest rates. If we move into 2025 with Trump 2.0 and Republican congressional majority, will prices really move back to the US central bank range of 2%? As Gabriel Galipolo moves into his likely role as the Brazil central bank chief, he will be keen to cut interest rates to appease President Lula, but also stimulate the economy, which is likely softening as we write. When you throw in US price pressures, falling local rates and a dose of US political instability (do you really think the US election will be incident free?) that doesn't equal a strong BRL.

Between then and now, many things will happen, not least a new democratic presidential candidate. This would likely happen at the democratic national convention on August 19th, and could provide a much needed impetus for a party which looks in disarray. If Brazil can control it's spending, rather than pay lip service to rising debt and budget deficits, then the path may become less rocky. Does Bolsonaro also try and make a come back if he sees Trump back in the white house? We wrote at the turn of last year that 2024 would be a very volatile landscape, not just locally, but globally. Not only has the geopolitical outlook worsened, but headwinds keep appearing - French politics, possible Lebanon invasion by Israel, and a stronger Russia, China, Iran.

Brazil must focus on its domestic scenario in order to avoid it's currency becoming a victim of an ever more deglobalizing world. Global capital has become very choosy on where it wants to go, so for Brazil to get some of it that means an independent central bank, coherent fiscal policies and less government corporate interference. Right now, none of those are a given so make sure you take advantage of the opportunities that will no doubt present themselves.