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Brazilian assets rally on Lula conviction, BRL erases losses for the year

Luiz Inácio Lula da Silva might have been the most popular president in Brazilian history.

But the markets were clearly relieved on Wednesday that Lula — as he is affectionately called — has become less likely to be able to compete in next year’s presidential elections after the political veteran was convicted and sentenced to nine-and-a-half years of prison on corruption charges. The country’s benchmark Bovespa stock index shot up 1.2 per cent on the news, while the Brazilian real extended its earlier gains to trade 1.4 per cent higher at R$3.2079 per dollar — a two-month high. The advance was enough to push the real back into positive territory for the year.

Brazilian bonds also got a bump. Yield on Brazil’s 10-year dollar bond — which was already down earlier this morning in a broader global bond rally following US Federal Reserve chair Janet Yellen’s dovish comments on inflation — extended its drop to 11 basis points to 4.722 per cent.

The guilty verdict, if upheld on appeal, will bar the former president from running in the 2018 elections. While current president Michel Temer is facing corruption charges of his own, the market is still hoping Mr Temer would have enough political capital to push through his reform agenda, including the much-needed pension reform.

“Given that a Lula victory would quash any hopes of much-needed economic and fiscal reforms, this would have been market-negative,” said Neil Shearing, chief emerging markets economist at Capital Economics. “It follows that today’s ruling is likely to give a boost to Brazilian markets. Expect the real to strengthen and long-dated local currency bond yields to drop over the next 24 hours.”