Brazil Real, Stocks Gain as Elections Seen Helping Spending Bill

(Bloomberg) -- Brazil’s currency and stocks advanced after parties allied with President Michel Temer won most of the cities that held mayoral elections over the weekend, a result that’s expected to strengthen his hand as he tries to push economic reforms through Congress.

The real climbed 0.2 percent to 3.1936 per dollar and the Ibovespa stock index rose 1 percent to 64,924.52, its highest level since April 2012, Monday in Sao Paulo. The second round of municipal elections gave the government coalition command of 80 percent of cities, Brazilian papers reported. Chief of Staff Eliseu Padilha said results give momentum to the economic agenda by showing the population supports Temer’s administration and his goal of limiting spending and debt, according to Estado de S.Paulo. The measures are aimed at paving the way for a rebound from the worst recession in a century.

Brazilian assets are among the world’s top performers this year on bets that Temer will be able to curb the budget deficit that cost the country its investment-grade rating. The Senate is preparing to examine the spending cap bill that is a key plank in his austerity platform.

"The election was a demonstration of strength from Temer and his supporters," Alvaro Bandeira, chief economist at the brokerage Modalmais, said from Rio de Janeiro. "As the reforms advance, there is more room for Brazilian assets to gain through the end of the year."

The Ibovespa ended higher for the fifth straight month, the longest such winning streak since 2009. Lender Itau Unibanco Holding SA was the main contributor to the benchmark equity index’s advance on Monday, adding 3.5 percent, after third-quarter results beat analysts’ estimates. Embraer SA, which beat analysts forecasts in the three months through September, was the best performer on the gauge after the head of its executive jet unit said that the company won’t use discounts to gain market share as it seeks to position itself as a premium-priced planemaker.

Investors were also encouraged by a report in Estado that the government had collected almost all of its targeted 50 billion-reais ($15.7 billion) in extra tax revenue through a law encouraging Brazilians to declare money held abroad.

"There is the consolidation of some good news amid signs that Temer’s allies’ political influence is growing," said Camila Abdelmalack, the chief economist at CM Capital Markets in Sao Paulo. "There is also optimism with the repatriation."

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, dropped 0.01 percentage point to 12.21 percent. Economists in the central bank’s weekly survey cut their interest rate forecasts for 2017 to 10.75 percent, the lowest level in more than a year.

Earlier this month, the central bank began a rate-cutting cycle that will likely extend into next year. Analysts in the survey held their 2017 inflation forecast at 5 percent, half a percentage point above the 4.5 percent target, while forecasting a deeper contraction of gross domestic product this year. Brazil is estimated to shrink 3.3 percent this year, more than the 3.22 percent estimate in the previous poll.

While companies that depend on domestic demand were the best performers on Brazil’s stocks market Monday, state-controlled producer Petroleo Brasileiro SA slumped with crude prices. Oil dropped to a one-month low after weekend talks between OPEC and other major producers failed to yield concrete details on an accord to reduce the global crude surplus.

--With assistance from Ney Hayashi To contact the reporters on this story: Paula Sambo in Sao Paulo at psambo@bloomberg.net, Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net. To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net, Sebastian Boyd, Jessica Brice