Lula win triggers Ibovespa circuit breaker, real tumbles

Brazilian stocks, the real and government bonds sold off sharply on Monday, Oct. 26, after President Luiz Inácio Lula da Silva unexpectedly won a fourth term. Investors had bet heavily on his right-wing rival. The Ibovespa fell 10% at the open, which tripped a circuit breaker that halted trading for 30 minutes, operator B3 said in a statement cited by Reuters. It was the first such halt since the pandemic sell-off of early 2020, according to Bloomberg.apnews.com+1

Lula's opponent was Flávio Bolsonaro, a senator and the son of former President Jair Bolsonaro. Lula took 51.79% of valid votes to Bolsonaro's 48.21% in Sunday's runoff, Bloomberg's tally of electoral court results shows. Bolsonaro has refused to concede and says he will seek to have the vote annulled, AP reported.aljazeera.com+1

A historic rout

The sell-off started in Asian trading. A Tokyo-listed Ibovespa fund managed by Nomura dropped about 15% as real futures slid 10%. Once trading resumed in São Paulo, the index was on course for its worst day since 1998, Reuters reported. Late in the session it was down nearly 15%, according to G1. Retailers fell around 50% as a group, and Petrobras Petróleo Brasileiro S.A. – Petrobras ↘ 0.89% also dropped, Estadão reported.myrtlebeachonline.com+3

The real weakened sharply against the dollar, with USD/BRL posting one of its biggest daily moves on record. Brazil's Treasury cancelled bond auctions planned for Oct. 27 and Oct. 29. In New York, the iShares MSCI Brazil ETF ↗ 0.44% fell steeply before the market opened. Futures for sugar, coffee and soybeans came under pressure.cnbc.com+2

Unwinding the Bolsonaro trade

Markets had rallied after Bolsonaro came first in the Oct. 4 first round. By Friday, stocks had closed almost 7% above their pre-vote level, and Kalshi gave Bolsonaro a more than 75% chance of winning, Reuters noted. Before Brazilian trading opened, Barclays ↗ 0.85% analysts warned that "Lula's victory should trigger disorderly moves in local markets," Reuters reported. Goldman Sachs The Goldman Sachs Group, Inc. ↗ 2.07% outlined an extreme scenario in which Brazilian equities lose about 15%, and XTB warned the damage could spread to other Latin American currencies and emerging markets more broadly. On Monday, Brazil's dollar bonds were the worst performers in emerging markets.xtb.com+3

Focus shifts to fiscal policy

Investors are now looking to Lula's choice of finance minister for signs of his fiscal approach. Public debt is above 82% of GDP. "Investors want a clear and credible commitment to fiscal discipline," said Alejo Czerwonko of UBS ↗ 0.71%, speaking to Reuters. J.P. Morgan Private Bank expects a negative reaction in the near term but does not see the result as a lasting shift in Brazil's outlook.privatebank.jpmorgan.com+1