EMERGING MARKETS-Brazilian markets crash after Bolsonaro's son says he has father's backing for presidency

By Niket Nishant and Nikhil Sharma

Dec 5 (Reuters) - Brazilian assets experienced a sharp selloff on Friday, after former President Jair Bolsonaro's eldest son, Senator Flavio Bolsonaro, said he had the backing of his father in next year's presidential elections.

The benchmark stock index Bovespa .BVSP tumbled 3.8%, its worst day since March 2021. The local currency real BRL= fell 2.4% - on pace for its worst day since early October.

Flavio Bolsonaro wrote on X that his father had chosen him for "the mission of carrying on our project for the nation."

The losses also weighed on a broader index of Latin American equities .MILA00000PUS and currencies .MILA00000CUS, which fell 3.8% and 1.6%, respectively, putting both on track for their worst day since early April when U.S. President Donald Trump's tariff announcements hit global markets.

The day's moves also left the indexes facing steep weekly losses.

Brazil's former president was barred from running for office in June 2023 and was sentenced to more than 27 years in prison for plotting a coup after losing the 2022 election. Some investors had bet on him backing a more market-friendly name with executive experience, such as Sao Paulo Governor Tarcisio de Freitas, his former minister.

"Elevated political uncertainty in Brazil is not a clear path in terms of monetary policy and fiscal policy. So that noise is easily perceived in all the financial metrics," said Andres Abadia, chief LatAm economist at Pantheon Macroeconomics.

Latin America's largest economy will hold a presidential election in October 2026, with polls favoring a win for President Luiz Inacio Lula da Silva against all potential right-wing challengers.

The country is bracing for a monetary policy meeting on December 10, with the central bank expected to hold its key rate at 15%, a Reuters poll of economists showed.

Meanwhile, the election in Honduras is also weighing on sentiment, while rising tensions between the U.S. and Venezuela loom in the background.

"In 2026, external conditions should remain broadly supportive, but domestic political cycles, fiscal challenges and uncertainty about geopolitical developments will likely slow inflows modestly," said Martin Castellano, head of LatAm Research at the Institute of International Finance.

In the U.S., investors assessed a key inflation report, which reinforced expectations that the Federal Reserve will cut interest rates by 25 basis points next week.

Rate cut expectations have powered much of the rally in emerging markets over the previous few sessions.

Fund flows underline the improved tone. Emerging market debt funds took in about $2.4 billion last week, up from $1.7 billion the week before, according to data from Morgan Stanley.

Elsewhere in Latin America, Argentine equities .MERV fell 1.4% and the peso currency ARS=RASL added 0.83% - both on pace for modest weekly gains. Its dollar-denominated bonds were also trading slightly higher.

The country unveiled the tender for a four-year dollar bond governed by local law as President Javier Milei's administration continued to test the waters for an eventual return to international capital markets.

In Mexico, stocks .MXX were down 0.34%, while the local peso MXN= rose 0.27%, hitting its highest level since July last year. The peso was headed for a weekly rise.

Colombian equities .COLCAP lost 0.5%, but were on pace for a second-straight weekly gain. The central bank may need to do more with monetary policy to moderate domestic demand growth, board member Bibiana Taboada said on Friday.

Chile's IPSA stock index .SPIPSA rose 0.4% to hit an all-time high on Friday in the run-up to the December 14 presidential runoff. The index was up 0.9% week-to-date.

Consumer prices rose 0.3% in November from the previous month, matching expectations. Traders expect a moderate cut at the central bank's next meeting on December 16.

Key Latin American stock indexes and currencies: