Petrobras shares fall 21.7% to $20.49 after Lula re-election

Key Facts

Petrobras shares fell 21.7% in premarket trading on October 26, to $20.49, after Brazilian President Luiz Inácio Lula da Silva was re-elected to a fourth presidential term. Investing.com reported that the stock came under pressure after Lula defeated Flávio Bolsonaro in Sunday’s runoff. The move came as investors repriced bets on fiscal policy and government spending following the election result. Before the vote, markets had shown positioning for a possible Bolsonaro victory, with some investors betting he would be more committed than Lula to cutting spending. The share decline was therefore tied to a shift in political and fiscal expectations, not an announcement of an immediate change to the company’s operations or dividends.

The move spread to other Brazilian assets during Asian trading on October 26, indicating that the repricing extended beyond the oil company’s shares. November Brazilian real futures fell 10%, while the Tokyo-listed Nomura iFree Ibovespa ETF dropped 15%. Before the runoff, stocks had closed on Friday about 7% above their levels ahead of the first round. The real was also about 5% stronger against the dollar than it had been before the first round. Investing.com attributed those earlier gains to expectations that tighter fiscal policy would allow borrowing costs to fall, expectations tested by Lula’s victory.

The market’s pre-election bet was also linked to interest-rate expectations and the ability to control public finances. Reuters said interest-rate futures reflected expectations that tighter public finances would allow borrowing costs to decline. In contrast, investors said they had been building bets on a rightward political shift, hoping Bolsonaro would be more committed than Lula to cutting spending. An analyst at Warren Investimentos said the market expected a sharp repricing and asset selling, and that interest-rate futures could reach their upper limit after the market opened. He added: "We expect a sharp market reaction on Monday, with strong repricing and asset selling, and interest-rate futures are likely to reach their upper limit shortly after the open."

Assessing what could shape investor sentiment, an investment official at UBS said they wanted a clear and credible commitment to fiscal discipline. He said gains made after the first round could be largely wiped out, and sentiment would remain weak until a fiscal plan became clear. He said: "Investors want a clear and credible commitment to fiscal discipline. We expect gains made after the first round to be largely wiped out, and sentiment to remain weak until a clear fiscal plan emerges." That puts spending and public finances at the center of the market’s focus on the next term, after expectations of lower borrowing had helped support Brazilian assets ahead of the second round. Politically, Flávio Bolsonaro declined to concede defeat after Lula’s re-election was announced.

Lula’s government faces the task over the next four years of slowing Brazil’s debt growth while protecting social programs and public investment, Reuters reported. This means fiscal restraint will be pursued alongside the need to maintain spending in those two areas, part of the challenge facing the president in his new term. Reuters warned that a lack of confidence in the government’s ability to meet its obligations could prompt lenders to demand higher interest rates. Higher rates could increase the government’s debt burden and make credit more expensive for companies and households. The agency said: "Without confidence in its ability to deliver, lenders may demand higher interest rates, adding to the government’s debt and making credit more expensive for companies and households."

Attention now turns to two scheduled dates on Petrobras’ calendar. The production and sales report is due on October 28, with the company set to announce third-quarter results on November 10. The first report comes two days after the stock’s premarket decline, while the third-quarter results give investors a subsequent date to follow the company’s disclosures. The announced dates do not include details about the report or results, but they set out the company’s next two scheduled releases after the election-related move. In the coming days, the reassessment of Brazilian assets will coincide with Petrobras’ scheduled updates.