The worst defeat in Brazil’s soccer history is giving a boost to the country’s stocks.

The iShares MSCI Brazil Capped ETF gained 1.5 percent at 1:19 p.m. in New York, set for the biggest advance in three weeks on speculation yesterday’s World Cup loss dims the prospects for President Dilma Rousseff to win re-election in October.

American depositary receipts of Petroleo Brasileiro SA added 3.3 percent, while state-run Banco do Brasil SA climbed 1.5 percent.

Markets in Sao Paulo are closed for a holiday.

Brazilian assets have rallied this year as polls showed Rousseff losing voter support, bolstering the prospects for a new administration to try to jump-start economic growth.

While UBS AG says the magnitude of yesterday’s 7-1 loss in the soccer-obsessed nation could curb the gains as consumer and investor confidence crumbles, the possibility of a new government that would intervene less in state-owned companies is enough to bolster stocks in the short term, ING Groep NV says.

“People were so convinced this was their World Cup, it’s a huge blow,” Eric Conrads, a money manager who helps oversee $500 million in Latin American stocks at ING, said in a telephone interview. “Given the magnitude of the loss, the way they lost, and the cost of the World Cup, I can only imagine that after the tears, some Brazilians will be angry” with Rousseff’s administration.

Rousseff, who was jeered at the stadium by some disappointed fans, has overseen the slowest economic growth for any Brazilian president in two decades. Yesterday’s loss to Germany dashed Brazil’s hopes of overcoming the national tragedy of losing the final match of the 1950 World Cup at home.

Humiliating Defeat

“It is such a humiliating defeat that you wonder whether it will have a negative impact on Brazilians’ psyche,” Geoffrey Dennis, who’s been covering Brazil since the early 1990s and is now head of emerging-market strategy at UBS, said yesterday. “Brazil has to get over this massive loss.”

While Rousseff’s popularity will dip in the next opinion polls, the soccer defeat is unlikely to have an impact on the election, according to Joao Augusto de Castro Neves, an analyst at political consulting firm Eurasia Group in Washington.

“It has a short-term impact,” Neves said by phone from Washington. “Dilma’s bigger worry is the economy.”
The cost to insure Brazil’s government debt against default in the swaps market for five years fell three basis points, or 0.03 percentage point, to 144 basis points. The extra yield investors demand to own Brazilian bonds instead of Treasuries fell two basis points to 2.08 percentage points.

’Historic Loss’

Since Rousseff took office in 2011, growth has decelerated to an average annual rate of 2 percent, while annual inflation has exceeded 6.5 percent, the upper limit of the government’s target range. The benchmark Ibovespa gauge has advanced 19 percent from a low on March 14 as Rousseff’s declining popularity sparked speculation she might be defeated in October.

“Brazil’s historic loss in the World Cup to Germany is nothing short of a national humiliation,” Tony Volpon, the head of Americas research at Nomura Holdings Inc. in New York, said in an e-mailed note. “For a country that defines so much of its national character around its footballing prowess, losing at home cannot but have major repercussions.”

After the match, officials reported isolated disturbances, with military police in Rio de Janeiro saying some fans fled a viewing party on Copacabana beach after a fight broke out. Globo News showed images of buses burning in Sao Paulo, though it wasn’t immediately clear if the vandalism was a reaction to the game.

25% Rally

Thousands of protesters demonstrated before the World Cup, decrying $11 billion in spending to host the tournament in a country where 7.2 million people still live on $1.25 a day or less.

The game may ultimately cost Rousseff the election, which will in turn spur a 25 percent rally in Brazilian stocks, according to Alberto Bernal, the head of research at Bulltick Capital Markets.

“This is going to be catastrophic for the national mood,” Bernal said by phone from Miami yesterday. “If the market sees the potential that Dilma will not be re-elected, then it will rally in a big way.”

A Datafolha survey published July 2 showed that 38 percent of Brazilians would vote for her in the October election, down from 44 percent in February. Aecio Neves of the Brazilian Social Democracy Party, or PSDB, had 20 percent support.

While it’s hard to gauge the impact on the elections, the mood will probably turn against the government and reinforce “the political trade” that has been moving Brazilian stocks, according to ING’s Conrads.
“Inflation is high, growth is slow,” Conrads said. “People want change in Brazil, and you see that in the stock market.”