Brazil Fund Falls 26%, Real Drops 12% After Lula’s Re-election
Key Facts
Luiz Inácio Lula da Silva was re-elected president of Brazil in the runoff held on October 25, receiving 64,256,232 votes, or 51.79% of valid votes, according to the Superior Electoral Court. His rival, Flávio Bolsonaro, received 59,826,041 votes, equivalent to 48.21%. As trading began in Brazil on October 26, the spot real fell about 12% against the dollar, while Ibovespa futures dropped nearly 15%, according to Reuters. In premarket U.S. trading, the iShares MSCI Brazil ETF fell 26%. Pressure quickly spread to the São Paulo exchange, sharply reversing gains made before the vote was decided.
B3 halted trading for 30 minutes after the Ibovespa fell 10% from its previous close, according to Reuters. The sell-off had appeared earlier in Asian trading, where November-delivery Brazilian real futures fell more than 10%. The Nomura NF Ibovespa Link ETF listed in Tokyo also fell 15% in the Asian session, according to Reuters via UOL. In the foreign-exchange market, the dollar closed at 4.9652 reais on October 23, then at 5.4576 reais on October 26, according to L7 data. The decline also spread to Brazil’s international bonds, with the bond maturing in 2056 the hardest hit, falling about 3 cents.
The moves followed a rise in Brazilian assets ahead of the runoff. Stocks closed on Friday, October 23, about 7% above their level before the first round, while the real was about 5% stronger against the dollar, according to Reuters. The gains markets had recorded in the period before the vote were thus reversed as the result of the second round became clear. Reuters said investors were watching for the incoming administration’s commitment to fiscal discipline, amid concerns about spending and debt. Lula’s team is targeting a budget surplus of about 1.3% of gross domestic product by 2030, while public debt exceeds 82% of GDP, according to the report.
Investors’ questions center on how any spending cuts would be implemented and whether the incoming government will present a clear fiscal plan. Alejo Czerwonko of UBS Global Wealth Management said investors want “a clear and credible commitment to fiscal discipline.” He added that sentiment would remain weak until the fiscal plan became clear. Divya Singaraveloo said Lula’s policies had discussed cutting spending without explaining the details of implementation. She said the choice of the next finance minister would be “an initial signal to markets,” as investors watch the government’s ability to turn pledges into specific fiscal arrangements.
The fiscal debate comes as Brazil faces economic forecasts and inflationary pressures. The International Monetary Fund projected economic growth of 2.4% in 2026 and inflation of 5.6% at year-end, gradually moving toward the 3% target by mid-2028. The fund called for a more ambitious fiscal effort to put public debt on a downward path while protecting targeted social spending. It said tighter fiscal policy supports lower inflation and paves the way for interest-rate cuts. These recommendations place public finances within the broader context of the incoming government’s pledges on spending and debt.
Markets in the coming weeks will focus on Lula’s choice of finance minister and what the appointment may reveal about the incoming administration’s approach to fiscal discipline, according to Reuters. Graham Stock said the appointment of the new minister in the coming weeks would be a key signal of that commitment. The National Treasury also canceled fixed-rate and inflation-linked bond auctions scheduled for Tuesday and Thursday, while keeping Tuesday’s auction of securities linked to the Selic rate, according to Trading Economics. The next presidential term is due to begin on January 5, 2027, according to the Associated Press. The ministerial appointment and subsequent fiscal steps will be among the key indicators markets watch after the sharp sell-off.