Election bets placed on predictive market platforms are already impacting exchange rates and the stock market in Brazil; understand why.
The Brazilian financial market closed higher on Thursday (September 10th), with the Ibovespa index rising 1,42% to 188.269 points, while the dollar fell to R$ 5,10. This movement went against the trend in external markets, which operated in negative territory.
The positive performance occurred even with a barrel of oil priced at US$107, a level that triggered warnings about inflationary pressures and the direction of global interest rates. According to reporting by O Globo, analysts point to two combined factors to explain the optimism: new electoral polls showing a tight race between Lula and Flávio Bolsonaro in a possible second round, with the senator from Rio de Janeiro numerically ahead in some surveys, and the price of oil itself, which, for Brazil, an exporter of crude oil, means more revenue in dollars and an increase in the value of shares in national oil companies, especially Petrobras.
Predictive betting and feedback
The Polymarket prediction market platform, banned from operating in Brazil since April, also entered the equation. On that Thursday, events related to Brazil ranked third among the most traded topics on the platform, with US$3 million in concentrated bets. The country was only behind bets involving PSV and Roma, who played a Champions League match that day, and even surpassed the volume of bets on the American midterm elections.
According to Fernando Siqueira, head of research at Eleven Financial, there is a feedback loop underway between polls, bets, and financial assets. “Things feed into each other: the week's polls show a rapprochement (between Lula and Flávio). And there's the news of the crisis in the Supreme Court, which isn't positive for Lula either. And then there's an increase in bets. Those who bet buy stocks, and those who see the bet improving start buying stocks too. It's one thing feeding into another, and it creates euphoria in one area. But it's all interconnected and turns into this rush to buy,” he said.
Luiz Figueiredo, former director of the Central Bank and advisor to Jubarte Capital, believes that the movement in the predictive betting market is yet another confirmation of a perception that has been circulating among economic agents for some weeks. “As an indicator to increase market appetite, without a doubt (predictive betting) has a total influence. Even more so with the market abroad going in the opposite direction. But what we are seeing is more of a confirmation than something truly new,” he stated.
Return of foreign capital
The influx of foreign capital reinforces the view that the movement has broader roots. Since August 20, foreign investors have injected R$ 11,1 billion into the Brazilian capital market, reversing a sharp outflow recorded at the beginning of the previous month. The assessment that shares of Brazilian companies continue to be "discounted," that is, traded below their perceived value, contributes to this return.
Frederico Nobre, equity manager at Warren, states that election polls, news coverage, and predictive betting affect the "sentiment and perception of institutional investors," who are responsible for moving large volumes. In his view, most financial market participants understand that the opposition candidate has a better chance of altering the trajectory of public debt relative to GDP. "The market interprets the alternation as an expectation about the (dynamics of) the trajectory of public debt, and the ability to exercise monetary policy with some easing, affecting the yield curve," he stated.
The appetite for Brazil is also reflected in New York. Call options on the EWZ, the main index fund (ETF) of Brazilian stocks traded on the American stock exchange, jumped about 86% in less than two weeks: from 2,8 million contracts on August 24 to 5,2 million last Friday (September 5), the highest level since 2007.
