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The Earth just moved in Brazil
Weekly investor research
08 October 2018
The last major political event in the EM calendar in 2018 is now truly underway. The first round of the presidential election gave a resounding victory to right-winger Jair Bolsonaro as Brazilians sought change after years of graft, crime and stagnation under PT and PMDB-led administrations. Beyond the initial market euphoria at Bolsonaro’s victory, the two longer-term drivers of performance will be the pension reform and a potentially long sustained cyclical upswing. Meanwhile, the US bond market is causing concerns in global fixed income markets. There are very different levels of the Fed funds rate priced into various markets. US bonds are pricing the Fed to hike more or less in line with the FOMC’s own predictions, but EM bonds now price in about 200bps more than the hikes the Fed says it will deliver. By contrast, European bonds do not even price in what the Fed has done so far. What does this mean for EM bonds?