By Asher Levine and Walter Brandimarte
SAO PAULO/RIO DE JANEIRO Mon Oct 27, 2014 6:39am EDT
SAO PAULO/RIO DE JANEIRO Oct 27 (Reuters) - Brazil's financial markets are set to plunge on Monday following the victory of President Dilma Rousseff over pro-business challenger Aecio Neves in Sunday's presidential election.
The sell-off may be contained in the next few days, however, if Rousseff signals she will tweak economic policy to boost Brazil's flagging economy, as hinted in a conciliatory first speech she gave after re-elected on Sunday.
After the closest, most divisive campaign since Brazil returned to democracy three decades ago, Rousseff won 51.6 percent of votes in a runoff against Neves, who won 48.4 percent support.
The tight and fast-changing election campaign had sent Brazil's financial markets on a wild ride with big gains whenever Rousseff lost ground in polls and drops whenever her odds looked stronger.
Rousseff's economic policies have been roundly criticized by investors for tipping Brazil into a recession while damaging state-run companies such as oil producer Petrobras and lender Banco do Brasil along the way.
Many investors placed their hopes on a Neves victory, seeing him as ready and able to rescue the private sector from what they see as the heavy and unpredictable hand of Rousseff's leftist government.
With the election now decided, Monday's open is expected to show a sharp selloff in both the Bovespa stock index and real, especially after both asset classes gained on Friday on mounting perception that Neves would eke out a win.
Long-dated contracts for interest-rate futures are also expected to sell off, driving yields paid on those instruments sharply higher. Those yields had fallen sharply recently on bets that mainstream fiscal and monetary policy in a Neves' government would make room for lower interest rates in the future.
The real has weakened 4.72 percent against the dollar this year, though has been supported by a central bank currency swap program in what many traders see as a managed trading band.
"The central bank is likely going to increase intervention to avoid what they likely see as overshooting of the real, but regardless it should be a large move of maybe up to 3 percent or so," wrote Citi analyst Dirk Willer.
The Bovespa index, which erased nearly all of its gains for the year last week, is also set to post a sharp loss.
The London-listed Brazil MSCI i-shares ETF hit seven-month lows on Monday, albeit in thin turnover. Earlier in the day, the Tokyo-listed Ibovespa exchange traded fund (ETF) dropped almost 7 percent reflecting investors' disappointment at the result.
Frankfurt-traded depositary receipts of Petrobras dropped 16.45 percent.
Any staunching of the losses in future sessions will most likely come on bargain-hunting and signals of more market-friendly policies from the Rousseff administration, analysts said. (Additional reporting by XX)
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