Why did the election result change the trading assessment?
- With nearly all votes counted, incumbent President Lula won with 51.8% of the vote, while Bolsonaro received 48.2%. Bolsonaro had led by a wide margin in the first round, but Lula reversed the result in the runoff.
- Polls had previously shown the gap between the two narrowing, but prediction markets were still pricing in a decisive Bolsonaro victory. The actual result therefore overturned Citi’s trading assumption that the runoff outcome was clear.
Why did Citi choose to close its positions?
- Citi went long the Brazilian real before the first round of voting and increased its Brazilian risk exposure further after the first round. After the election result was announced, the bank closed its Brazilian risk positions and removed its overweight in Brazilian equities from its global asset allocation.
- Citi believes Brazilian asset prices could fall below fair value; because the market held long positions before the election, position adjustments could cause prices to fall excessively. This assessment supported its decision to exit the risk positions first.
What were the gains or losses on the closed trades?
- The NTNF position maturing in 2031 was opened on 5 October at 12.90 and closed at 15.45, with the foreign exchange risk unhedged. Citi recorded a loss of 2.2 million on the trade, equivalent to 2.2% of its global macro strategy portfolio.
- The BZ1 index position was also opened on 5 October, at an entry level of 208,990, and closed at 178,105; Citi recorded a loss of 689 thousand, equivalent to 0.7% of the portfolio. Closing quotations for both trades were as of 26 October.