Brazil torn between EU export surge and U.S. tariff war as elections loom.

Brazil woke up this Tuesday with its gaze fixed on two forces pulling in opposite directions — and whose tension defines the country's economic moment. On one side, external signals of opportunity: exports to the European bloc rose 26% in the first two months of the Mercosur-EU agreement, according to an ApexBrasil survey obtained in advance by Folha de S.Paulo, adding US$ 2 billion in May and June. On the other, unrelenting American pressure: the 25% tariffs imposed by Washington, which Development Minister Márcio Elias Rosa openly labeled a political "sanction-tariff" against the Lula administration rather than a conventional trade instrument. Between these two poles unfolds the central dispute of Brazil's external agenda — and the market is paying attention.

The dollar fell 0.41% on Monday, closing at R$ 5.088, in a session marked by monitoring of the Middle East conflict, where signs of willingness to negotiate between Washington and Tehran reduced risk aversion. The IGP-M's second July preview fell 1.11%, according to FGV, a figure that reinforces three consecutive weeks of downward revisions to inflation projections in the Focus bulletin, albeit at a slower pace. FGV's GDP Monitor recorded a 0.7% rise in activity in May versus April, with 1.9% expansion in the quarter ending that month — numbers that sustain a picture of modest growth, but without the dynamism needed to reverse the longer-term industrial deterioration. Unido data compiled by Iedi placed Brazil 69th in a ranking of 90 countries in manufacturing industrial growth in the first quarter, a steep drop from the 33rd position held at the start of 2024. The diagnosis of Iedi's chief economist, Rafael Cagnin, is surgical: high interest rates constrain credit-dependent industrial sectors, and recent growth is concentrated in commodity processing, not a broad-based recovery.

This picture of high rates as a structural bottleneck echoes in consumer credit data. One year after the launch of Crédito do Trabalhador, 74% of formal workers who joined the private payroll-deductible loan program already carry two or more active contracts, according to a Serasa Experian study. The number points less to product success and more to deepening indebtedness among households seeking to supplement compressed incomes. Sabesp, now privatized, launched a renegotiation fair offering discounts of up to 80% for delinquent customers — a symptom of the same phenomenon.

On the fiscal front, the day brought revelations that test the credibility of subnational public account management. The government of Amapá acknowledged a nearly R$ 1 billion cash shortfall just 44 days after contracting, with National Treasury backing, a R$ 536 million loan. The aggravating factor: the Ministry of Finance had loosened a 12-month quarantine rule — which was supposed to prevent new federally guaranteed loans after default — to allow the operation just three months after the default. The episode illustrates, with uncomfortable precision, the moral hazard embedded in sovereign guarantees to states and the fragility of subnational fiscal discipline that CAF, the Latin American development bank, also identified in an assessment presented in Rio. In parallel, the government sent Congress an urgent bill transferring to the Union the payroll cost of civil servants on leave to serve union mandates — R$ 15.4 million per year that, added to other riders approved overnight in half-empty committees, reinforce the perception of incremental and silent deterioration in public accounts.

The M&A market provides another revealing angle on the current environment. Total M&A value in the first half reached R$ 166.8 billion, with 3.4% growth in mobilized capital, but the number of transactions fell 35.3% versus the same period in 2025, reaching 593 deals — the lowest volume since 2018, according to TTR Data. The divergence between financial volume and deal count suggests concentration in larger transactions, in an environment where companies with strained balance sheets are seeking minority stake sales as an alternative to a cooled equity market. Raízen sold its Caarapó mill in Mato Grosso do Sul to Adecoagro for R$ 760 million. Grupo Itajobi, a sugar-ethanol complex with three mills in the interior of São Paulo, filed for an injunction to restructure R$ 3.76 billion in liabilities. Braskem, controlled by IG4 Capital with 50.1% of voting capital and Petrobras with 47%, saw its debentures and CRAs trade in the secondary market at roughly 30% of face value — a significant deterioration that prices in the growing difficulty of restructuring approximately R$ 50 billion in liabilities, in a picture complicated by state presence.

On the geopolitical and energy front, the war in Iran generated enough pressure for the Lula government to postpone the end of the diesel subsidy, held at R$ 1.12 per liter for August. Oil royalty revenue in the semester reached R$ 36.5 billion, with R$ 9.6 billion directly attributable to the Brent rise caused by the conflicts — the average barrel came in at US$ 92.56, well above the International Energy Agency's initial projection of US$ 57.50. Brazilian ports are advancing pre-salt oil export infrastructure expansion, while Acelen, the oil arm of Arab fund Mubadala, signed an agreement with Bunge for soybean oil supply for sustainable aviation fuel (SAF) production in Bahia, in a project expected to receive R$ 15 billion. The plan to raise the anhydrous ethanol content in gasoline to 35%, known as E35, moves to a new testing phase in September.

Foreign investors have begun pricing electoral risk — with the vote less than three months away — into Brazilian assets with growing frequency. Société Générale closed long positions on the real against the euro and the Chilean peso, directly citing the proximity of the electoral calendar. Wells Fargo, through strategist Alvaro Vivanco, reversed its positive read on the local currency, mentioning political-fiscal noise as a determining factor. The combination of electoral uncertainty, insufficient fiscal adjustment, and a tax reform whose implementation is technically threatened — five ICT sector entities warned the Ministry of Finance of the risk that the model won't be ready by January 1, 2027 — creates a scenario in which short-term fundamentals compete directly with long-term risk perception.

In the coming weeks, the