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Rousseff Cabinet May Spur Bovespa Rally, Goldman Says

Brazilian President-elect Dilma Rousseff may spark a stock rally by making “market-friendly” Cabinet picks that indicate “fiscal rigor,” Goldman Sachs Group Inc. said.

The benchmark Bovespa index may climb to 78,000 by yearend, a 7.4 percent advance from its close last week, should ministerial appointments signal the government will achieve primary surpluses of 3.3 percent of gross domestic product, Stephen Graham, an analyst at Goldman Sachs in Sao Paulo, wrote in a note to clients dated yesterday.

“The target implies containment of inflation expectations, and so less need for monetary policy to shoulder the burden of inflation control,” Graham said. “Despite the variety of possibilities, we think a market-friendly cabinet is likely. There have been unusually clear comments by Rousseff on specific fiscal targets.”

Rousseff, who takes office Jan. 1, said last week she will seek to cut net public debt to 38 percent of GDP by the end of her four-year term from 41 percent to allow Brazil’s benchmark interest rate to decline.

“On the other hand, failure to move on the fiscal front could increase the tension mounting between FX rates, interest rates, and inflation, where solutions for any one problem exacerbate others,” Graham wrote.

The Bovespa was little changed at 72,599.85 at 2:15 p.m. New York time. Brazilian short-term interest-rate yields declined today for the first time in a week on speculation Rousseff will pressure the central bank to lower borrowing costs next year, while longer-maturity contracts jumped on concern policy makers will be forced to raise rates later to curb inflation.

The yield on the contract due January 2012 dropped 5 basis points, or 0.05 percentage point, to 11.42 percent, while the yield on the contract due January 2017 jumped 14 basis points to 11.86 percent.

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