Former Senator Marina Silva announced on Saturday that she would join the PSB party and support the presidential candidacy of Pernambuco Governor Eduardo Campos. The surprising decision came two days after the Superior Electoral Court (TSE) refused Marina’s application to establish a new political party because her petition lacked approximately 50,000 signatures (Saturday was the deadline for politicians to join a party to run in the 2014 elections). The polls released so far have indicated that Marina Silva would be the strongest opposition candidate to run against President Dilma Rousseff of the PT next year (she had 26% of the vote in the latest Datafolha poll). Eduardo Campos has not been doing so well (he had just 8% in the latest Datafolha poll), as he is not widely known yet outside his home state, but could become a strong candidate, considering that his party is relatively large and his being from Pernambuco is a political asset in the Northeastern region. In our opinion, it was a clever move by Marina Silva. By joining the PSB and pledging to support another candidate, she has kept the project to build a new party alive, while simultaneously securing the popular support that she has enjoyed so far, and potentially transferring it to Campos. Moreover, should she remain ahead of Campos in the polls in the run-up to the elections, she could become the PSB presidential candidate and Campos could be her VP instead.

A Campos/Marina candidacy could arise as the main opposition candidacy and break the polarization between the Workers’ Party (PT) and the PSDB. Such polarization has been very convenient for the PT, since the PSDB’s hesitant liberal rhetoric has been unable to neutralize the political effects of the PT’s populist policies. Note that both Campos and Silva served as ministers under President Lula’s administration, which could protect them from suspicion that they would dismantle the social welfare programs introduced by him.

Although Rousseff’s re-election remains the most likely scenario, it is possible that she will face a much more challenging campaign, and the probability of a second-round runoff vote has increased. While a victory of Campos/Marina could add uncertainty because market participants know little about their economic policies, both candidates (especially Campos) have signaled that they could be more market-friendly than Rousseff. In the near term, however, we believe a more difficult path to re-election means that the government will be more inclined to pursue populist policies that produce instant gratification for voters. Thus, we believe the likelihood of a significant fiscal adjustment before the elections has become even lower.

Eoin Treacy's view President Rousseff’s term has been characterised by a lack of the charisma that allowed her predecessor to accomplish so much. While Brazil is busy preparing for major global sporting events, not a great deal has been done to tackle bottlenecks in the country’s infrastructure or to progress with the reform necessary to stimulate growth. The deterioration in industrial metal prices and long lead time to developing the country’s deep water oil fields have also contributed to the underperformance of the stock market.

The Bovespa Index dropped out of a two-year range in May before finding support in the region of 44,000 from July. It has since unwound the oversold condition relative to the 200-day MA and is now testing the lower side of the overhead range. The Index has eased back to test the 50,000 area over the last month and is now firming. A sustained move below that level would suggest a return to supply dominance beyond the short term.