sinks

Investors react to Lula’s election victory with a sharp decline in the Brazilian real and concerns over increased spending and fiscal challenges.

Brazil’s real dropped against the United States dollar on the heels of Brazil’s President Luiz Inacio Lula da Silva’s unexpected re-election after right-wing Flavio Bolsonaro, the son of former President Jair Bolsonaro, led in the first round of voting earlier this month.

Brazil’s currency dropped against the dollar by 12 percent in spot trading. Bovespa stock index futures tumbled nearly 15 percent on Monday.

“I’m not surprised the real is sinking sharply; traders are covering their bets that assume a Bolsonaro victory and tighter fiscal policy,” Rachel Ziemba, adjunct senior fellow at the Center for a New American Security, told Al Jazeera.

Brazil’s stock exchange halted trading for 30 minutes. The Bovespa index fell 10 percent from its previous close, triggering a circuit-breaker safety mechanism and reversing a rally earlier this month amid expectations of a shift to the right after Bolsonaro won the first round.

Ziemba says Bolsonaro’s refusal to concede the election has driven some financial uncertainty.

“The market pressure is also amplified by the objections raised by Bolsonaro, but the scale of the victory suggests that the result will stand,” she said.

Interest rate futures had also reflected expectations that tighter fiscal policy under Bolsonaro would allow borrowing costs to decline.

“They [investors] assume more domestic spending and higher rates in Brazil. However, the real is still likely to be supported by strong commodity revenues,” Ziemba noted.

Stocks closed on Friday almost 7 percent above their level before the first round, while the Brazilian real was nearly 5 percent stronger against the US dollar.

Interest rate futures are up 3.1 percent, rising sharply after President Lula’s win. Interest rate futures had previously reflected a tighter fiscal policy amid expectations that Bolsonaro would oust the incumbent and that he would allow borrowing costs to decline.

Lula faces an increase in Brazil’s debt and will be challenged with protecting both social programmes and investment, with investors looking for signs of whether his gradual fiscal approach can bring borrowing costs down.

Lula’s team aims to produce a budget surplus of about 1.3 percent of gross domestic product (GDP) by 2030. That would leave money to cover part of the interest bill, reducing the need for fresh borrowing. But public debt already exceeds 82 percent of GDP, while pensions and other legally required spending limit where savings can come from.

“Lula’s policies have talked about spending cuts, but he has not gone into the details of how that is going to look,” said Divya Singaravelu, head of research at Meridian 1305 Capital.

Attention will now turn to Lula’s choice of finance minister and what it signals about his fiscal approach.

At least 11 people believed to still be missing, with rescue operations underway.

The US coastguard has said it rescued 16 people from the Pacific Ocean after a boat sank off Mexico’s Baja coast.

The coastguard said on Friday it responded to a Mayday call reporting that a boat was sinking. The search is ongoing for 11 people believed to be still missing.

The boat went down about 225km (140 miles) west of Ensenada, Mexico.

A rescue helicopter reached the site about two hours after someone on the boat transmitted the Mayday call at about 1am (08:00 GMT) on Friday, said coastguard Lieutenant Santiago Tamburini.

It took about 90 minutes for the coastguard crew, which included a rescue swimmer, to pull the 16 people from the water, Tamburini said.

The people rescued were Mexican nationals, according to the Mexican consulate.

One survivor was being treated for a suspected shark bite and two were in critical condition, authorities said.

The rescued were flown by helicopter to San Diego, California, and transported to hospitals. The Mexican consulate in San Diego said it offered consular assistance.

The coastguard and US Navy are continuing to search the area with two helicopters, a fixed-wing plane, a cutter and a navy combat ship.

The boat sank in an area frequented by smugglers transporting migrants to the US. It is also popular with fishing and leisure boats.

Details about the boat’s origin, destination and what it was doing are not clear. No vessel, only debris, was found, and it was unclear what type of boat was involved, the coastguard said.

“Boats in that area can be for fishing, leisure, personal recreation. We just don’t know what they were doing out there. We all know it’s a suspected smuggling route,” Tamburini said.