Brazil markets to see fresh volatility after Bolsonaro supporters storm capital

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By Carolina Pulice and Tatiana Bautzer

MEXICO CITY/SAO PAULO (Reuters) - Brazilian assets may be hit by fresh volatility on Monday after supporters of former President Jair Bolsonaro stormed key government buildings, echoing the U.S. Jan. 6 insurrection of 2021, analysts said.

Images of the coordinated invasion on Sunday afternoon, which overwhelmed law enforcement and left the Supreme Court building and other locations with severe internal damage, shocked onlookers, including those from the financial industry.

Ricardo Lacerda, founder and CEO of Brazilian investment bank BR Partners, said he expects markets to react with volatility in the short term, especially on Monday, given the higher institutional risk. "The end of polarization seems to be far and may drain the new government's energy," Lacerda said.

Brazil's real currency and its benchmark Bovespa stock index, which outperformed other emerging markets in Latin America during most of 2022, had already been hit by turbulence in the first days after President Luis Inacio Lula da Silva's inauguration on concern about increased government spending.

But the real and Bovespa performed better on Friday after Lula said the country may grow while keeping government finances in check.

Still, some analysts said any negative market reaction could be short-lived. "Given that the situation seems to be under control in Brasilia, I would expect any asset class impact to be short-lived," said Alejo Czerwonko, CIO for Emerging Markets Americas at UBS Global Wealth Management.

Carlos Eduardo Furlanetti, professor at FIA Business School, expects that a strong reaction from the institutions, including Congress and the Supreme Court, supporting the president may even help the Lula government politically in the medium term.

Bruno Komura, analyst at asset manager Ouro Preto, expects a bad initial reaction in markets, with interest rates rising and the currency and stock exchange falling. But Komura expects the markets to recover by the end of the week considering a strong institutional reaction against the rioters.

Carla Argenta, chief economist at CM Capital, points out that the Brazilian rioters were helped by lenient law enforcement in Brasilia, something that didn't happen in the U.S. Capitol and that adds to the perception of political risk in the country. But that may be reversed if the institutions show unity against the Brasilia invaders, she added.

Enrico Cozzolino, partner at asset manager Levante Investimentos, said the acts showed a sharp division within the society. "We have seen the lack of consensus since the impeachment of former President Dilma Rousseff."

While large sections of the Brazilian banking industry has tended to back Bolsonaro given his free market credentials relative to Lula's Workers' Party, the sector's main industry association roundly condemned Sunday's violence. Isaac Sidney, head of banking industry group Febraban, called for "firm reaction" against the actions.