Brazil’s markets recover some ground after selloff; minister vows fiscal discipline

SAO PAULO, Oct 27 (Reuters) - Brazilian markets recovered some ground on Tuesday after a sharp selloff triggered by President Luiz Inacio Lula da Silva’s reelection, while his government downplayed the previous day’s turmoil as a temporary repositioning by investors and pledged to maintain fiscal responsibility.

The real strengthened nearly 2% against the US dollar to around 5.31 per greenback, after tumbling more than 11% in the previous session. The Bovespa benchmark stock index rose 1% after ending Monday down 13.9%, while interest rate futures retreated.

Finance Minister Dario Durigan said the recent market rout reflected positioning rather than a deterioration in Brazil’s economic fundamentals, noting that investors had built up bets on a victory by right-wing presidential challenger Flavio Bolsonaro before Sunday’s runoff.

"Yesterday’s reaction was much more about the positions the market had adopted in recent days," Durigan told reporters in Brasilia. "It was not a reaction to fundamentals."

He said calmer trading on Tuesday suggested markets were becoming more rational, adding that he had been in contact with financial market participants. Durigan also sought to reassure investors that the government remained committed to fiscal responsibility.

Markets plunged on Monday after Lula secured a fourth non-consecutive term, wiping out gains accumulated during a rally fueled by expectations of a victory by Bolsonaro, who was ahead of the incumbent president after the first round of voting on October 4.

Investors have since focused on whether the incoming administration can deliver credible fiscal adjustment while preserving social spending and investment, as well as on Lula’s selection of key economic officials.

JPMorgan analysts said markets had yet to develop a clear narrative for Lula’s fourth administration beyond the sharp correction in asset prices, but argued investors would likely reassess the outlook in coming weeks as the new government’s economic team and policy plans take shape.

"And we dare to say that as much as the market is adverse now, it will construct a story that leads equity markets forward," they wrote in a note to clients.

Alfredo Menezes, a partner at asset manager Armor Capital, said the selloff had created attractive entry points for investors.

"When stop-loss moves happen in the market, dozens of opportunities emerge. Emotion does not talk to reason," Menezes wrote on X, adding that shares of some companies he considers high-quality assets had fallen as much as 36%.