Brazil assets tumble offshore after Lula’s runoff win

Traders are preparing for heavy losses in Brazil on Monday, October 26. President Luiz Inácio Lula da Silva came from behind to beat right-wing Senator Flávio Bolsonaro in Sunday's runoff, and most investors had bet on the opposite result. Lula took 51.8% of the vote to Bolsonaro's 48.2%, according to Brazil's electoral court, Bloomberg reported. Bolsonaro has called for the result to be annulled.moneycontrol.com

The first signs of a selloff came from overseas markets. An ETF tracking Brazilian equities fell as much as 16% in Tokyo, its biggest intraday drop since 2020. A currency contract on the CME ↘ 0.09% priced the real at 5.60 per dollar, which implies a drop of more than 10% from Friday's close. Reuters said November real futures were down 10% during Asian hours and that the Nomura NF Ibovespa Link ETF ↘ 0.66% fell 15%. In U.S. trading, the iShares MSCI Brazil ETF ↗ 1.77% was down more than 18% at one point, according to Folha de S.Paulo.oglobo.globo.com+2

Circuit Breakers in View

Trading desks in São Paulo expect the selling to be fierce enough to set off circuit breakers. Brokerage Monte Bravo had estimated that the Ibovespa could fall 11% in the first hour of trading if Lula won. Under the rules of exchange operator B3, a 10% drop pauses trading for 30 minutes and a 15% drop pauses it for another hour. The last time Brazilian stocks hit a circuit breaker was in early 2020.moneycontrol.com

"It's going to be a tough day. The market will reprice everything," said Bruno Funchal, CEO of Bradesco Asset Management. Luis Felipe Vital of Warren Investimentos expects interest-rate futures "to hit their upper limit shortly after the open".money.usnews.com+1

Unwinding the Bolsonaro Trade

Brazilian markets rallied after Bolsonaro unexpectedly finished first in the opening round three weeks ago. By Friday, stocks had closed almost 7% above their pre-first-round level, and the real had gained nearly 5% against the dollar. Firms including Morgan Stanley ↘ 2.44%, JPMorgan Chase ↘ 1.47% and Citigroup ↘ 1.54% had issued bullish calls on Brazilian assets.money.usnews.com+1

Eyes on Fiscal Plan

Analysts say what happens next depends on whether Lula can convince investors he will fix the public finances. Public debt is already above 82% of GDP, and his team is aiming for a primary surplus of about 1.3% of GDP by 2030. "Investors want a clear and credible commitment to fiscal discipline," said Alejo Czerwonko of UBS Global Wealth Management ↘ 1.07%. He added that any plan will need support from an opposition-leaning Congress.money.usnews.com

Divya Singaravelu of Meridian 1305 Capital said the choice of finance minister will be an early signal for markets. "We want to see what the 2027 budget and spending cap looks like," she said.money.usnews.com