Brazil's Markets Crumble as Election Year Uncertainty Rattles Investors

Brazil faces a rare confluence of external pressures and domestic vulnerabilities that are testing the resilience of its economy in the midst of an election year — and markets are already extracting a price for that accumulated uncertainty.

The Ibovespa closed last week down 0.76%, at 169,019 points, racking up eight consecutive weeks of losses — the worst streak since the Plano Real. The dollar surged to R$5.15, its highest level in two months, pressured by international markets betting on a resumption of the rate-hiking cycle in the United States after May payrolls surprised with the creation of 172,000 jobs, well above the 80,000 consensus. In the domestic market, future interest rates climbed to one-year highs, with traders revising their bets on the Selic — BNP Paribas now projects the rate at 14% by the end of 2026, with cuts resuming only in December. Central Bank President Gabriel Galípolo will attend a BIS event in Shanghai next week, but seats on the Copom should remain vacant until after the elections, according to Mario Mesquita of Itaú Unibanco.

Layered onto this environment of global monetary tightening is a marked deterioration in Brazil's trade relations with its main partners. The European Union has confirmed the ban on imports of Brazilian beef, poultry, and other animal-origin products, with the suspension slated for September. The Lula administration says it expects to reverse the measure through diplomatic channels, but Luis Rua, the Agriculture Ministry's Secretary for Trade and International Affairs, did not rule out reciprocal measures should Brazil "not be treated as a partner." The European decision is not limited to animal protein: restrictions on Brazilian steel and soybean oil deepen friction with Brussels just months after the provisional entry into force of the Mercosur-EU agreement, exposing the fragility of the trade architecture built over years of negotiation. At the same time, the government sees an ever-narrowing window to negotiate the second American tariff on Brazilian products, of 12.5%, while U.S. investment in Brazilian companies plunged 29% in 2025, dragged down by the services sector — a direct reflection of Trump's first round of tariffs.

In the corporate arena, the week was dominated by the most significant chapter yet in the largest out-of-court restructuring in Brazilian business history. Raízen, controlled by Cosan and Shell, confirmed creditor adherence to the restructuring plan covering R$64.7 billion in debt. According to sources close to the process heard by Brazil Journal, roughly 75% of creditors have signed on, with expectations of reaching 80% by early this week. The deal foresees the conversion of 45% of the debt into equity at R$0.25 per share, a R$3.5 billion injection from Shell, and a R$500 million contribution from the family office of Rubens Ometto, founder of Cosan. Once the capitalization is finalized, expected in the first quarter of 2027, creditors will hold more than 80% of the company. To shore up cash, Raízen sold its fuel distribution operations in Argentina — the country's second-largest downstream platform, with more than 880 stations under the Shell brand — to Swiss trading house Mercuria Energy for US$1.4 billion, a transaction that will free up between US$900 million and US$1 billion in liquidity.

The Raízen crisis is, in part, a reflection of broader pressure across the entire energy and aviation chain. The war in Iran has driven jet fuel prices higher, forcing Azul to cut 5% of its capacity across all routes, according to CEO John Rodgerson. LATAM's chief executive, Roberto Alvo, warned that, if fuel prices remain elevated through 2027, the sector will have to make further adjustments. IATA projects Brazilian domestic traffic falling below 90 million passengers, in a market that has already lost 9.9% of its routes over six years. Embraer, meanwhile, reported caution among airlines in exercising aircraft purchase options, although it has surpassed 500 ordered units of the E2 line and remains hopeful of advancing in India with a military aircraft tender. Vice President Geraldo Alckmin sees an opportunity in this scenario: Brazil, he argued, is uniquely positioned to lead the production of sustainable aviation fuel, or SAF — a thesis that grows more attractive precisely as oil prices rise, though the challenges of scale and cost remain considerable.

On the fiscal front, pressure intensifies as elections draw near. The government is multiplying demand-stimulus programs in an economy already operating at full capacity, repeating the pattern observed in 2014 and 2022. Columnist Samuel Pessoa, of Folha de S.Paulo, argues that such measures aggravate imbalances at a moment when general government gross debt already reached 78.6% of GDP last December. S&P downgraded the credit rating of BRB, the bank owned by the Federal District government, to "highly vulnerable," citing uncertainty over capitalization — a warning sign for institutions with exposure to subnational entities. On the regulatory front, Finance Minister Dario Durigan publicly pressed CVM's new leadership to reinstate the mandatory disclosure of sustainability information by publicly traded companies, a rule revoked by the agency in May. Meanwhile, the tax reform is beginning to produce concrete effects, with projections of a 30% increase in the number of companies operating in the Manaus Free Trade Zone and adjustments in sectors such as private education — where taking advantage of the reduced rate will require sales-model restructuring starting in 2027.

For the week ahead, attention turns to the release of May's IPCA by the IBGE — with economists already revising upward their projections for food inflation in 2026, to around 7%, given the combined impact of the war in Iran and the threat of El Niño on the 2026/2027 harvest. The World Meteorological Organization estimates a greater than 90% probability that the phenomenon will remain active through November, with direct effects on planting in the Center-West. In a scenario where agribusiness is already grappling with compressed margins, high interest rates, and the European meat ban, any further climate deterioration could turn what is today pressure into a full-blown crisis. The market will be watching.