Lula trails Flávio Bolsonaro by about two points heading into Brazil's October 25 runoff

What this means

For holders of the real, Brazil's currency, and Brazilian local-currency bonds, the question that matters most is fiscal: whether the next president will have the votes in Congress to pass a credible budget framework. The name of the winner matters less. That gives the Centrão parties leverage over both campaigns. Bolsonaro is negotiating for their support now, and Lula would have to negotiate with them after a win. A Bolsonaro victory would probably be read as better for state-company governance. A Lula victory would probably be read as continuity in social spending. Either way, the fiscal price is set by the parties in Congress. The 2014 runoff between Dilma Rousseff and Aécio Neves is a useful precedent: currency volatility rose sharply in the final two weeks as polls shifted. The desk's read: the result will depend on turnout among abstainers and older voters, which polls measure poorly. Expect the real and local interest rates to become more volatile over the next two weeks, with markets responding more to signs of Centrão alignment than to headline polling. If Centrão parties formally commit to one side before October 25, the uncertainty premium should shrink quickly whichever candidate they back.