Brazil Stocks Fall 17% and the Real Drops 12% as Markets React to Lula’s Reelection
Brazil's benchmark stock index fell 17% and the real lost about 12% against the dollar on Monday after Luiz Inacio Lula da Silva won a fourth term, reversing a rally built on bets that his right-wing rival would win.
Brazilian stocks and the real sold off sharply on Monday after President Luiz Inacio Lula da Silva won a fourth term in Sunday’s presidential runoff, defeating Senator Flavio Bolsonaro. The selloff followed Lula’s runoff win on Sunday, which reversed weeks of market bets on a change of government.
The dollar jumped more than 12% to 5.6055 real shortly after the market opened, a 10-month high, according to LSEG data cited by Dow Jones Newswires. Brazil’s benchmark Ibovespa index fell 17% to 169,516 points, a two-month low. The iShares MSCI Brazil ETF fell 25% in early trade, a drop that would be its largest one-day fall on record.
Trading on Brazil’s stock exchange was halted for 30 minutes after the Ibovespa fell 10% from its previous close, exchange operator B3 said in a statement reported by Reuters. B3 had earlier expanded daily trading limits for stock index, dollar and interest rate futures in response to the volatility. Brazil’s Treasury also canceled its regular bond auctions scheduled for October 27 and October 29.
The selloff reached U.S.-listed companies with Brazil exposure. In New York, shares in fintech Nu Holdings fell 21%, while e-commerce group MercadoLibre fell 10%, Dow Jones Newswires reported.
A reversal of the first-round rally
Markets had rallied earlier in October after Bolsonaro finished first in the opening round. Stocks closed on Friday almost 7% above their level before the first round, while the real was nearly 5% stronger against the dollar, Reuters reported. Goldman Sachs analysts said in a note on Friday that Brazilian equities had rallied sharply after the first round, then gave back modest gains as polls tightened during the runoff campaign. Prediction markets had continued to favor Bolsonaro heading into the final vote.
“Markets had largely expected a Bolsonaro victory, so part of the reaction reflects investors rapidly reversing their positions rather than a sudden deterioration in Brazil’s economy,” eToro market strategist Lale Akoner said in a note. Akoner added that volatility would likely continue, in part because concerns over government spending could keep borrowing costs high.
Macquarie Group strategist Thierry Wizman said traders would likely take the view that Brazil will muddle through for the next four years, rather than pursue the fiscal consolidation, privatization and pro-business reforms that investors had associated with a Bolsonaro win.
What investors watch next
Attention now turns to Lula’s choice of finance minister and what it signals about his fiscal approach, Reuters reported. Goldman Sachs economists said the first question for investors would be who leads the Ministry of Finance, and said fiscal consolidation strategies would be in focus.
Neither camp gave very detailed fiscal proposals during the campaign, and the market will require policy execution rather than campaign promises, Janus Henderson portfolio manager Thomas Haugaard said, according to Dow Jones Newswires. Goldman Sachs said major structural reforms seem unlikely under a fourth Lula term, and it expects modest measures to contain growth in primary spending, along with increases to an already high tax burden.
Bolsonaro’s refusal to concede and his pledge to seek an annulment added to investor uncertainty, Reuters reported. ING strategist Chris Turner said what matters for local markets is how quickly Bolsonaro accepts the result, or at least allows the constitution to run its course.
Reporting based on coverage by Dow Jones Newswires and Reuters.
