By Gabriel Araujo and Karin Strohecker

SAO PAULO/LONDON (Reuters) -Brazilian equities were higher in choppy trade on Monday, a day after thousands of supporters of former President Jair Bolsonaro stormed government buildings in the capital, echoing the Jan. 6, 2021, insurrection in Washington.

The Brazilian real weakened roughly 0.55% against the dollar in spot trading, while the country’s benchmark stock index Bovespa gained 0.5% after falling as much as 0.75% earlier in the day.

The coordinated invasion on Sunday afternoon, which overwhelmed law enforcement and left the Supreme Court building and other locations in Brasilia with severe internal damage, shocked observers, including many in the financial industry.

Some analysts argued that markets had been calmed by Brazilian police’s containment of the violence in Brasilia, while others predicted there would be political reverberations that could impact the South American country’s economic policy.

“We were surprised by the level of violence,” said Matheus Spiess, an analyst at Empiricus. “Brazil’s stock exchange had detached from that noise about a potential institutional rupture, so we can definitely see some negative effects.”

Economists at JPMorgan and Capital Economics said the implications of the rioting would be short-term and mainly political, though they noted leftist President Luiz Inacio Lula da Silva and his new administration’s agenda could be strengthened.

“The riots could result in a long-lasting risk premium on the country’s financial assets, particularly if they prompt President Lula to double down on his economic agenda,” said William Jackson, chief emerging markets economist at Capital.

TURBULENCE

Brazil’s real and the Bovespa, which outperformed other emerging markets in Latin America during most of 2022, had already been hit by turbulence in the first few days after Lula’s Jan. 1 inauguration on concerns about increased government spending in Latin America’s largest economy.

On Friday, both had performed better after Lula said the economy may grow while government finances are kept in check.

“As the president gets stronger and the opposition weaker, one could see a greater radicalization from the left, perhaps pushing the agenda further than one would think,” said Emy Shayo Cherman, Latin America and Brazil equity strategist at JPMorgan.

Mariano Machado, principal Americas analyst at risk intelligence company Verisk Maplecroft, said the events in Brasilia would undermine fragile market confidence in Brazil, noting investors should brace for volatility ahead.

Still, some analysts said any negative market reaction could be temporary.

“With the situation contained, we expect a limited effect on Brazilian assets, despite the strong negative repercussion,” analysts at broker XP Investimentos said in a research note.

On Monday hundreds of Brazilian police in riot gear and some on horseback amassed at an encampment of Bolsonaro supporters near Brasilia’s army headquarters. Lula has promised to bring those responsible for the violence on Sunday to justice.

Later, Bolsonaro was admitted to a hospital in Florida, but his condition was “not worrying”, according to a source close to his family.

“Given that the situation seems to be under control in Brasilia, I would expect any asset class impact to be short-lived,” said Alejo Czerwonko, chief investment officer for Emerging Markets Americas at UBS Global Wealth Management.

“I think the situation will quickly normalize,” said Cristian Maggio, head of portfolio strategy at TD Securities in London. “Yet, it is an event worth keeping an eye on, as it may not be fully over just yet.”

(Reporting by Gabriel Araujo and Paula Laier in Sao Paulo, Karin Strohecker in London; additional reporting by Susan Mathew in Bangalore, Tatiana Bautzer and Peter Frontini in Sao Paulo and Carolina Pulice in Mexico City; editing by Diane Craft, Susan Fenton and Paul Simao)

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