Markets could quickly spiral into crisis mode

Heuler Andrey | AFP | Getty Images

Opponents of former Brazilian President Luiz Inacio Lula da Silva demonstrate in the city of Curitiba on March 28, 2018.

An upcoming presidential election in Latin America’s biggest economy has the spill-over potential to dramatically impact emerging markets, strategists told CNBC this week.

Brazil is set to hold a two-round ballot next month, with the vote widely expected to be the most unpredictable since the country’s return to democracy three decades ago. Political corruption investigations have dominated the headlines ahead of the election, as voters become increasingly alienated with several of their representatives.

Meanwhile, emerging market currencies in general have suffered in recent weeks, as escalating trade tensions threaten to curb global economic growth. The MSCI emerging markets stock index is down nearly 12 percent since the start of the year.

“The evident economic difficulties that have hit Turkey and Argentina this year have so far been viewed by markets as largely confined to those two countries — with limited spill-over potential to other emerging markets,” Jon Harrison, managing director of emerging-market macro strategy at TS Lombard, told CNBC via email.

“What has changed is Brazil. The likelihood of a market friendly outcome in the Brazilian election first-round has receded (and that) has the potential to shock markets out of their complacency,” he added.