Brazilian stocks and the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) rallied Monday after far-right presidential candidate, Jair Bolsonaro, garnered more votes than any other candidate in the first round of Brazil’s presidential election, which was held Sunday, Oct. 7.
The controversial Bolsonaro did not get the 50% of the vote required to avoid a runoff. He heads to an Oct. 28 runoff election against Fernando Haddad of the left wing PT party.
The markets have supported Bolsonaro partly due to the presidential candidate’s appointment of Paulo Guedes, a University of Chicago-trained financier, as his “one-stop shop” on economic policy. Investors believe Guedes is the best hope of a revival of further reforms, which have stalled in recent years.
Following the first round of the election, options activity in EWZ soared in Monday’s U.S. trading session.
“Roughly 128,000 calls and 134,000 puts have traded on EWZ so far today, three times what’s typically seen at this point and volume pacing in the 100th annual percentile. Most active is the November 31 put, though the activity here appears to be tied,” according to Schaeffer’s Investment Research.
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On Monday, EWZ jumped above its 200-day moving average for the first time since August. The fund is the largest US-listed ETF dedicated to Brazilian stocks.
“This is very similar to the U.S. election in 2016,” Danilo Kawasaki, chief operating officer at Gerber Kawasaki, told CNBC. “You had a far-right candidate come out of nowhere and win.”
Bolsonaro is seen as a market friendly contender due to his favorable economic platform. The presidential candidate wants the Brazilian central bank to be more independent and to privatize state-run companies. He has also pledged to take a tough stance against corruption.
“Elsewhere, it looks like new traders may be purchasing new positions at the October 39.50 call for a volume-weighted average price of $0.95. If this is the case, breakeven for the call buyers at the close next Friday, Oct. 19 — ahead of Brazil’s Oct. 28 runoff election — is $40.45 (strike plus premium paid),” according to Schaeffer’s.
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