Brazil Fund Falls 26% Pre-Market After Lula Wins Presidency Again
Key Facts
The election of Luiz Inácio Lula da Silva as Brazil’s president again sent market bets back to square one, driving Brazilian assets sharply lower in pre-market trading on October 26. The Superior Electoral Court declared Lula the winner of the runoff held Sunday, October 25, after a contest against Flávio Bolsonaro. Lula received 64,256,232 votes, or 51.79% of valid votes, compared with Bolsonaro’s 59,826,041 votes and 48.21%. In pre-market trading, the iShares MSCI Brazil ETF fell 26%, Petrobras shares dropped 20%, Nubank shares fell 24% and Mercado Libre shares declined 10.3%. The losses came as bets on a rightward political shift, on which investors had based expectations for fiscal reforms, receded.
The selloff extended beyond stocks: November Brazilian real futures fell more than 10% in pre-market trading, and some long-dated international bonds dropped by more than two cents. Brazil’s stock exchange halted trading for 30 minutes after the Ibovespa index fell 10% from its previous close, triggering a circuit breaker, according to a statement from the exchange operator. The Treasury also canceled its regular auctions of inflation-linked and fixed-rate bonds, which had been scheduled for October 27 and 29. The moves show repricing spreading from equities to the currency and government debt. Markets had entered the runoff with different bets: stocks closed Friday about 7% above their levels before the first round, and the real was about 5% stronger against the dollar.
Analysts and markets said they had expected Flávio Bolsonaro to win and had priced in reforms as Brazil faced worsening public finances and rising interest rates. Luis Felipe Vital, head of macro strategy at Warren Investimentos, said he had expected “a sharp reaction on Monday, with strong repricing and asset selling, and futures interest rates are likely to hit their upper limit shortly after the open.” William Jackson of Capital Economics said Lula’s victory would dash hopes for reforms that improve public finances and growth prospects. He added that rate cuts at two meetings this year “no longer look likely,” given rising fiscal risks and a weak real. These concerns reflect how borrowing costs are sensitive to the budget trajectory and the government’s ability to rein in debt.
The government faces the challenge of slowing debt growth while protecting social programs and investment, with public debt above 82% of gross domestic product. Lula’s economic team is targeting a primary budget surplus of about 1.3% of GDP by 2030, leaving resources to cover part of the interest bill and limiting the need for new borrowing. But a lack of confidence in the ability to deliver on this path could lead lenders to demand higher interest, increasing the debt burden and credit costs for companies and households. The government expects modest economic growth of 2.3% next year, as fiscal challenges and high interest rates persist. Economist Monica de Bolle said a hostile Congress could make passing reforms and managing the budget more difficult.
Investors will focus on Lula’s choice of finance minister and what it reveals about his fiscal approach, as well as on clear signs of the government’s commitment to fiscal discipline and a path to stabilizing debt. Alejo Czerwonko of UBS said investors want “a clear and credible commitment to fiscal discipline,” and sentiment may remain weak until a clear fiscal plan emerges. Markets will scrutinize the 2027 budget and spending cap for signs of how fiscal promises will translate into figures. Lula begins his new term on January 5, while facing a Congress described as the most conservative since the country’s return to democracy, with Bolsonaro’s allied party holding majorities in both chambers. De Bolle said this Congress “will make passing any reform through it extremely difficult, even attempting to manage the budget.”