After Brazil's 7-1 loss to Germany in the semi-final on Tuesday, Brazilian fans were inconsolable and officials reported isolated disturbances, with military police in Rio de Janeiro saying some spectators fled a viewing party on Copacabana beach after a fight broke out. Many say President Dilma Rousseff has sunk Brazil's economy into stagflation. Photo: AP

Conventional wisdom has been that a Brazil loss at home in the World Cup would be a positive for the country’s financial markets. A defeat, the argument went, would sour the national mood and prompt voters to oust President Dilma Rousseff, who has sunk the economy into stagflation.

Tuesday’s 7-1 loss to Germany, though, was so crushing that it upends that theory, according to Geoffrey Dennis, the head of emerging market strategy at UBS, who has been covering Brazil since the early 1990s.

Yes, the defeat would hurt Rousseff’s chances at re-election in October, but the lopsided outcome could also damp investor and consumer confidence in a country that obsessed about its national pastime, he said.

“It is such a humiliating defeat that you wonder whether it will have a negative impact on Brazilians’ psyche,” Dennis said yesterday. “It’s going to confirm to the people that ‘Look, our economy is struggling, we cannot get any growth, now we don’t even have a decent football team either’.”

With Brazilian markets closed yesterday for a holiday, the iShares MSCI Brazil capped exchange-traded fund gained 0.5 percent in early US trading while American depositary receipts of state-run oil producer Petrobras added 0.4 percent by 8.17am in New York.

The benchmark Bovespa stock index has advanced 19 percent from a low on March 14 as Rousseff’s declining popularity sparked speculation that a new administration would take over and help jump-start the economy.

Since Rousseff took office in 2011, growth has decelerated to an average annual rate of 2 percent, the slowest for a Brazilian president since Fernando Collor, who resigned in 1992 amid corruption allegations.

Her policies aimed at reviving the economy have stoked annual inflation to more than 6.5 percent, the upper limit of the government’s target range.

Tuesday’s loss, the worst defeat in the country’s history, dashed Brazil’s hopes of overcoming the national tragedy of losing the final match of the 1950 World Cup at home. Brazil will now play for third place in the tournament on Saturday.

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

The loss “is nothing short of a national humiliation”, Tony Volpon, the head of Americas research at Nomura Holdings in New York, said.

“For a country that defines so much of its national character around its footballing prowess, losing at home cannot but have major repercussions beyond the acts of violence seen after the defeat.”

A Datafolha survey published last week showed that 38 percent of Brazilians would vote for the president in the October 3 election, down from 44 percent in February. Aecio Neves of the Brazilian Social Democracy Party, or PSDB, had 20 percent support.

Thousands of protesters demonstrated ahead of the World Cup, decrying $11 billion (R118bn) in spending to host the tournament in a country where 7.2 million people still live on $1.25 a day or less.

Over 1 million people took to the streets last year to protest against inflation, corruption and poor public services.

As the Brazilian team was thrashed by its opponents on Tuesday, some in the stadium jeered Rousseff, who had promised to host the “cup of cups”.

She wrote on her Twitter account that she was saddened by the defeat, also using lyrics of a popular Brazilian song to urge the nation to overcome the loss.

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. “If the market sees the potential that Dilma will not be re-elected, then it will rally in a big way.”

Brazilian markets might come under pressure if a World Cup defeat sent protesters to the streets while failing to put a meaningful dent in Rousseff’s popularity in the wake of an “unfortunate combination of structural worries and diminished hope for new policies”, Eamon Aghdasi, a strategist at Société Générale in New York, wrote in a report on Tuesday.

He recommends selling Brazil’s real versus the Mexican peso.

UBS’s Dennis said the psychological burden of the defeat might take a while for Brazilians to overcome.

“I do not think this result leads to a knee-jerk rally in markets,” Dennis said.

“Brazil has to get over this massive loss.” – Bloomberg