Ibovespa Falls 13.43% After Lula Victory, Triggering Trading Halt on Brazilian Exchange
Key Facts
Luiz Inácio Lula da Silva defeated Flávio Bolsonaro in the presidential runoff, prompting Brazilian markets to sharply reprice assets. Lula won 51.79% of valid votes, against Bolsonaro’s 48.21%, a margin of 4.4 million votes, according to Reuters via UOL. The Ibovespa closed down 13.43% at 177,539.81 points on October 26, according to preliminary data reported by Reuters. That was the index’s biggest percentage loss since March 2020. The decline exceeded 17% during the session, when the index hit 169,516.43 points.
Pressure spread to the foreign-exchange and debt markets, signaling that the selloff extended beyond listed shares. The Brazilian real fell more than 11% against the dollar in early spot trading, according to Reuters via MarketScreener. The price of the sovereign bond due in 2054 fell by 2.5 cents, while its yield rose to 7.45%. Five-year sovereign credit default swaps also climbed to 151.67 basis points, compared with a close of 120.21 basis points on Friday, October 23. This coincided with a decline of more than 15% in the market index during the session, Reuters reported.
Trading on the São Paulo exchange was halted for 30 minutes after the Bovespa index fell 10% from its previous close, according to Reuters via MarketScreener. The halt came after losses breached that threshold, under the market’s circuit-breaker mechanism. At the company level, Petrobras shares fell 20% in Monday trading, while Nu Holdings shares dropped 26% in early trading, according to Yahoo Finance. The EWZ fund also closed at $33.71 on October 26, down from $42.59 on October 23, according to EL7 data. NU shares had closed at $15.16 on October 23, according to EL7 data.
The losses reflected a reversal in investor bets ahead of the result. Investors had positioned for a Flávio Bolsonaro victory after the first-round result strengthened expectations of a more market-friendly direction and an improved fiscal position, according to Reuters via UOL. The rally in shares to a record high after the first round had supported those bets, according to analysis reported by Reuters via Investing.com. At Friday’s close, shares were about 7% above their level before the first round, and the real was about 5% stronger against the dollar, according to Reuters via BOL/UOL. Economist Mauricio Monge said Lula’s victory "led investors to reassess the fiscal outlook during his fourth term."
The market’s sensitivity to fiscal policy reflects the scale of debt and the social pledges made during the election. A Reuters Breakingviews analysis said Lula’s pledges to raise wages and protect social benefits contrast with the market-friendly recovery promised by his rival, while debt stood at 83% of gross domestic product. The Treasury canceled its two regular auctions of inflation-linked and fixed-rate bonds, scheduled for October 27 and 29, respectively, according to Reuters via MarketScreener. Finance Minister Dario Durigan said the Treasury intervened in the bond market on Monday and conducted exceptional buybacks after canceling the auctions. The official fiscal target for the following year included a primary surplus of 0.5% of gross domestic product, with a tolerance band of 0.25 percentage points in either direction.
Investors are watching Lula’s choice of finance minister and what it will signal about his approach to managing public finances. Reuters said markets would monitor the appointment and signals about the policy agenda, while analysts said it could take months to settle how to reconcile fiscal priorities. This also depends on the president-elect’s ability to build a coalition that can work with him in Congress, according to an analyst quoted by Reuters via Investing.com. Durigan said the government would seek a higher actual primary surplus the following year, without specifying a figure, and would submit legislation targeting the midpoint of the primary-balance target range. The government’s signals on fiscal discipline will remain in focus after the election result repriced Brazilian assets.