MercoPress. South Atlantic News Agency

Confidence in da Silva policy lifts markets

Brazilian financial markets rose strongly on Wednesday morning amid growing expectations that an incoming Workers' party (PT) government may be able to maintain economic stability and advance structural reforms.

An opinion poll on Tuesday confirmed that Luiz Inácio Lula da Silva is set to win by a significant margin in Sunday's second round of the presidential election.

The rise was strongest in the bond markets with the C bond gaining 3 per cent in early trading in New York. The average yield spread over US Treasuries - the most widely accepted measure of political risk - fell to 18.59 percentage points, its lowest level for six weeks. The Real gained 1.48 per cent against the dollar and the Bovespa stock index was up by nearly 2 per cent.

Graham Stock, head of sovereign strategy for Latin America at JP Morgan, said a number of traders were moving to cover short positions (formed when they sell bonds that they do not own) because expectations of a "rapid deterioration no longer looked such a safe bet".

PT leaders recently reaffirmed their commitment to fiscal stability and said that the primary fiscal surplus of 3.75 per cent of gross domestic product could be increased. The PT is also prepared to push through legislation to increase the autonomy of the central bank and tackle social security reform.

All this has been welcomed by fund managers, although investors are looking for signs of greater consistency and coherence from the PT over the next few months. Trading volumes have been relatively thin. "Dedicated emerging market fund are comfortable with the positions they have going into the second round," said Mr Stock.

The PT's offer to open discussions with the centrist Democratic Movement party (PMDB) has been well received by investors. The PT and its leftwing allies will probably need to make deals with the PMDB as well as the Social Democratic party (PSDB) of José Serra - the government candidate - if they are to govern effectively.

In the poll, published by the Ibope agency, Mr Serra made up some ground on Mr da Silva, with his voting intentions rising from 31 per cent to 32 per cent since last week while Mr da Silva's remained constant at 60 per cent. Excluding null and void votes, the poll still gives Mr da Silva a 30-percentage-point lead over his rival, a gap regarded as unbridgeabl