Investigations into 'hidden partnership' increase political risk premium in the market

Recent Federal Police activity regarding an alleged 'communion of interests' involving President Lula's son has returned political risk to investors' radars, testing the resilience of Brazilian institutions amidst fiscal fragility. As the market detects signs of interference or lack of transparency, the cost of capital rises, reflecting long-term governance uncertainty. With the commercial dollar up 1.13% over the last 7 days to R$ 5.1862, any further noise from the Executive branch acts as a volatility catalyst, forcing investors to price in higher risk premiums for domestic assets. The current macroeconomic scenario, featuring a 14.00% Selic rate, imposes a natural brake on economic activity. Persistent negative news regarding the core of power, with six recent unfavorable sentiment alerts, inhibits foreign capital inflow. Combined with a 12-month IPCA of 4.44%, high interest rates and political instability create a 'latent stagflation' environment, making risk asset allocation prohibitive. From a credit cycle perspective, institutional noise reduces liquidity for long-term projects. Historically, when the political risk premium rises, the market retreats toward liquid assets, abandoning capital-intensive firms or infrastructure projects dependent on regulatory stability. The 0.29% dollar increase over the last 30 days, moving from R$ 5.171, indicates cautious market positioning. If investigations advance, the dollar's upward trend should gain traction, pressuring inflation and forcing the Central Bank to maintain restrictive interest rates for longer than projected. For the next 30, 90, and 180 days, uncertainty is expected to prevail, with the political risk premium likely eroding returns on state-owned and domestic-market-oriented companies.