The markets react with concern to Lula da Silva’s speech: the stock market falls and the dollar rises

The two speeches by President Luis Inácio Lula da Silva, with an emphasis on the state and public spending, at the inauguration ceremony on Sunday, generated doubts and shares of skepticism in the markets with analysts saying the president thus ended up revealing what he covered up during the campaign about his orientation of the economy.

This distrust was picked up by the São Paulo stock exchange, which reacted with a 3.18% drop, dragged down by the just over 6% plunge of state-owned oil company Petrobras on its first day after taking office. The dollar, in turn, rose by 1.2%.

The newspaper state He critically argued on Monday that the project that transcended presidential messages “has brought back a more evolutionary vision with the state as the pillar of the economy.”

The two interventions, the first in Parliament and the other in the Presidency, had as cornerstones the denunciation of the social inequity that surrounds the country and a harsh condemnation of Jair Bolsonaro’s management.

But critics accuse Lula of a clash he insists on and which shouldn’t exist between fiscal responsibility and social assistance, as if one were to deny the other.

In this sense, worried that Lula would define the spending cap as “stupidity”, that is to say, the legal limitation of public expenditure which has been in force since it was imposed by one of his allies, Henrique Meirelles, when he was minister of the economy in the transitional government of Michel Temer.

“The logical extreme of this reasoning opens the way to qualifying (even) limiting the growth of public spending as stupidity,” said writer and analyst William Waack.

In the analysis of Elena Landau, who was an economist in the campaign of then presidential candidate and now Minister of Planning and Budget, right-wing Senator Simone Tebet, the question of fiscal responsibility is still dubious, since it is difficult to reconcile it with the measures announced by Lula.

“It was a poor speech in terms of programmatic content, making it clear that it will use BNDES, Caixa and local authorities to induce income-free public spending,” Otávio Vieira, Nest Investimentos managing partner in Economic Value, said more harshly.

“This is a very different tone than the Lulinha paz e amor of the first term”he added, and “is closer to the interventionism of the second PT government with Dilma Rousseff”, who succeeded Lula and ended in a devastating crisis.

However, the reaction seems exaggerated, estimates the newspaper Folha de São Paulowho stated in his editorial that “ceremonies of this kind should not be taken as indicators of the course of the new government”.

He added that the main question being asked today is how far Lula will be willing to go at the political center to “ensure governance, maintain economic recovery and overcome sterile polarization.”

Among his first steps, Lula has passed a series of decrees to stop Bolsonaro’s stamp policies such as the flexibility to purchase arms and the privatization of businesses. He also reactivated the Amazon Fund.

​Lula opted for an enlarged cabinet of 37 ministers against the current 23 which houses all of its allies. And he has named figures in many cases with contradicting profiles, which is where analysts look.

At the beginning of December, Lula had already chosen as finance minister the former mayor of Sao Paulo, Fernando Haddad, a hard core politician of the PT. But he split the wallet in three.

He handed over Industry and Commerce to his vice president, Geraldo Alckmin, a leader of historical right-wing militancy and good relationship with the markets. Liberal Senator Tebet has appointed Al Piano, the central portfolio because it follows the budget and public spending. They are counterweights.

The president did not specify what kind of alternative controls he will implement in economic matters, especially on the spending ceiling. Haddad said he will send a new rule to Congress early this year that he hasn’t detailed.

The minister clarified that “we are not prepared for adventures” trying to calm the alarming behavior of the market.

In this sense, the aforementioned Waack remarks that in truth “there is nothing surprising in President Lula’s first speech. He’s right on target when it comes to the political tactic, which is to present himself as a savior. It is in line with what can be defined as the general ideas of Petismo, also in foreign policy.

MB Associados chief economist, Sergio Vale, agrees with the speeches were consistent with what the president has already underlined.

But he argued that “the difficulty is having an economy minister who gives similar signals. The focus should be on a new tax framework and tax reform, but Lula avoided these topics”She said.

These analysts point out that Lula has suggested resuming the “reindustrialization” of the countrybut indicating that it would correspond to the State “to be the articulator of Brazilian industry to reach the 21st century.

Like? With access to financing at ‘adequate costs’ with the resumption of subsidized credit with high costs for the tax authorities”.

This is a moot point. With the increased use of public banks there could be a negative effect on the capital market. In this sense, the head of strategy of MAG Investments, Patricia Pereira, warned that “for now, all the signs are of fiscal expansion. They have to show measures on the other line to change market expectations”.

Fernando Siqueira, head of research at Guide Investimento, summed up that Lula’s speeches have shown, citing the use of state-owned companies as growth inducers and saying the spending cap is “stupid,” that it continues to approach legacy of the Roussef government and “it is very negative for the markets”.

He predicted a growing backlash from investors. “Lula praised Dilma’s government, which was disastrous, and the tone of his speech raises fears of being an interventionist in state-owned companies,” he said.

Siqueira says so None of this is new, but while making those statements on campaign is one thing, reaffirming them as president-elect carries more weight.

“Many people expected him to moderate his speech after taking office, but it didn’t happen“, he said. According to him, the market still has room to react badly, especially in relation to the maximum cost price.