The shock was regional, not global.
October can be summarized in a single line: country risk fell from 655 to 573 bps after the first round in Brazil, when the market began pricing in a Flávio Bolsonaro victory, and ended the month at 787, its highest since October 2025. Over the week it rose 80 bps, with the biggest jump on Monday the 26th (from 707 to 765), the first session after Lula's re-election. The spread closed 132 bps above its level prior to that election.
The relative moves explain why this episode deserves its own reading. Between the October 23 and October 30 closes, the Ibovespa fell 18.1% in reais and close to 25% in dollars; the MSCI Merval lost 10.6% in dollars and the Globales around 3%. Over the same period, the EMB emerging market debt ETF rose 0.4% and the 10-year Treasury yield fell from 5.00% to 4.94%. The shock did not come from the base rate or from a general exit from emerging markets: it was regional and concentrated in the two credits with the highest political premium in the region. Our hypothesis is that Argentina was not hit through its trade with Brazil, but because its spread had leaned on borrowed regional sentiment and still lacks an anchor of its own: a defined source for the 2027 dollars.
International outlook: Brazil reprices, the Fed does not yield. Brazil: the correction we expected, deeper than anticipated. Lula won with 51.79% of valid votes. On Monday the Ibovespa fell 13.9% and the real depreciated 8.2% to 5.40 per dollar, with foreign investor outflows of R$ 2,846 million. The week closed with the index at 167,922 points, the dollar at R$ 5.44 (+9.0%) and DI contracts to 2031 near 15.3%. The adjustment comfortably exceeded the reference of 190,000 points and 5.20 reais we outlined last week, and the fiscal signal is still missing: the economic team has not been defined.
In our view, a good part of the adjustment is already priced in. A drop of almost 25% in dollars in five sessions discounts considerable fiscal deterioration, even with an opposition-majority Congress capable of curbing spending expansion. But the floor will be set by names, not valuation: a credible Finance Minister and an explicit fiscal rule could start a recovery; a prolonged delay would sustain the premium. The Copom on November 3-4 is the first test: with the Selic at 13.75% and a weaker real, consensus has shifted to expecting a pause.
The impact on Argentina was transmitted first through the financial channel. Bank ADRs fell between 15% and 17% on the week (Galicia -15%, Supervielle -17.1%), in line with what we anticipated for the highest-beta assets. The trade channel is slower but more persistent: with the real 9% weaker and the wholesale peso rate almost flat, bilateral competitiveness with the main destination for industrial exports deteriorated close to 9% in a single week, a direct blow to the automotive complex.
Fed: a pause with a hiking bias. The Federal Reserve held rates at 3.75%-4.00%, but Lisa Cook and Beth Hammack voted for a 25 bps hike. Kevin Warsh avoided giving guidance on December. The data do not support the pause: third-quarter GDP grew 3.4% annualized (3.1% expected) and September's PCE came in at 3.6% y/y (3.1% core). Futures assign a 75% to 85% probability to a December hike. The fact that the 10-year yield fell in this context does not reflect inflation relief, but demand for safety amid the tech sell-off: on Friday the Nasdaq lost 2.9%, with growing doubts about the cash flow of the companies leading investment in artificial intelligence.
For Argentina, the conclusion is that compression will not come from abroad: with Brent above USD 110 and a Fed preparing to hike, the base cost of money will remain near 5%. Oil, at least, supports the energy surplus.
Argentine outlook: the BCRA buys, the Treasury covers, credit hesitates. The exchange rate was the most stable variable of the week. The wholesale rate closed at $1,534 (+0.3%), 27% below the band ceiling ($1,950.97), and the gap with the contado con liquidación ended at 8.3% (CCL at $1,662). That stability came at a cost: by our estimates, the Treasury sold close to USD 100 million on Monday, and the BCRA, which accumulated purchases of USD 1,395 million in October, only resumed buying on Thursday and Friday (USD 143 million). Gross reserves ended the month at USD 48,562 million, affected by month-end movements and the drop in gold.
In pesos, Wednesday's auction was more reassuring than prices. The Treasury awarded $11.56 trillion with a 107% rollover and validated a 2.10% effective monthly rate on the February 2027 Lecap. The relevant data point is the composition: 22% was awarded in a dollar-linked bill maturing in January 2027. The market is not fleeing the peso, but it is buying coverage, with maturities that fall before the electoral calendar.
Equities suffered more than credit: the Merval posted five straight losing sessions and closed October down 7.8% in dollars. The Globales fell close to 3%, with a curve that remains steep: the GD30 yields 10.9% and the GD35 11.9%. We read that slope as the measure of the problem. The market does not doubt short-term repayment capacity, backed by reserve purchases and the external surplus, but rather the dynamics after 2027.
Outlook: from contagion to a test of its own. What changed. The Brazilian electoral premium was fully given back and dragged country risk to one-year highs. What did not change is the base rate, near 5%, nor the local diagnosis: rising reserves and an external surplus, against 2027 financing that remains undefined.
What we expect. Stabilization in Brazil once the economic team is announced, without a quick recovery to October levels. For Argentina, country risk that is unlikely to return to the 650 bps area without a signal of its own on the source of the 2027 dollars. We maintain our preference for short tenors on the dollar curve and CER coverage in pesos, October's best-performing asset.
US elections, the variable of the week. On Tuesday, November 3, the House of Representatives and 35 Senate seats are up for election. Models assign an 82% to 95% probability that Democrats retake the lower chamber; the Senate is more uncertain. A divided Congress would limit fiscal expansion and could ease long-term rates. For Argentina the channel is also political: the alliance with the Trump administration, which included US Treasury backing in 2025, is part of the anchor for expectations. A broad defeat for the ruling party would not alter that support immediately, but the market could read it as weaker backing. Close attention should be paid to the results and the speed of the count: a slow or disputed tally would prolong volatility.
Risks. On the upside: a credible Finance Ministry appointment in Brazil, a drop in oil and an official definition of 2027 financing. On the downside: a Fed hike in December with signals of further tightening, a second wave of tech selling and further deterioration in activity that complicates the 2027 Budget, scheduled for the floor on November 25.
What to monitor. The November 3 elections, the Copom on the 3rd and 4th, and the US employment report on Friday the 6th (around 55,000 jobs and 4.2% unemployment expected). In Argentina, the continuity of BCRA purchases, whether the Treasury sells foreign currency again, and October's CPI. If country risk stabilizes alongside the Ibovespa, the contagion will have been transitory. If it keeps rising with Brazil steady, the market will be pricing Argentine risk, not regional risk.
