Brazilian Markets Crash After Lula’s Surprise Election Win Stuns Investors
Investors had hoped for friendly overhauls such as spending cuts and deregulation
- Brazilian financial assets suffered a historic rout after leftist leader Luiz Inácio Lula da Silva won the presidential election.
- The Brazilian real slid nearly 8% on Monday, its greatest one-day decline since 1999, according to LSEG data. The country’s benchmark stock index fell 14%.
- Investors had anticipated a victory by Flávio Bolsonaro, hoping for investor-friendly overhauls like spending cuts and deregulation.
Brazilian President Luiz Inácio Lula da Silva’s surprise re-election routed stocks and other financial assets in the South American country, punishing global investors who had bet on his defeat.
The Brazilian real slid nearly 8% on Monday, its greatest one-day decline since 1999, according to LSEG data. The country’s benchmark stock index fell 14%, the worst one-day drop since the onset of the Covid-19 pandemic. The index’s plunge triggered a circuit breaker, leading Brazil’s stock-exchange operator to temporarily halt trading.
Global investors had piled into Brazilian markets in recent weeks after Flávio Bolsonaro—the eldest son of former President Jair Bolsonaro—bested da Silva in the first round of the election in early October. Investors cheered Bolsonaro’s anticipated election victory, sending the Bovespa stock index to a record high on hopes he would carry out investor-friendly policies such as spending cuts and deregulation.
On Sunday, the leftist leader won 51.8% of the vote against 48.2% for Bolsonaro, electoral authorities said, with over 99% of the votes counted. He was just two days away from turning 81.
“Everyone is very surprised today,” said Chris Turner, global head of markets research at ING. “There was a strong consensus that it was going the way of Bolsonaro which was seen as positive for local assets.”
Instead of the expectation of fiscal consolidation under Bolsonaro, traders will likely take the view that Brazil will muddle through for the next four years, said Thierry Wizman, Macquarie Group global foreign-exchange and rates strategist.
Da Silva has made lavish spending promises, championed a shorter working week without a cut in pay and proposed debt relief for struggling households. He also floated free public transportation on weekends, seeking to reconnect with poorer voters who had long formed the backbone of his support.
Brazil’s government bonds sold off Monday, driving up borrowing costs.
State oil firm Petrobras’s shares fell 8% in São Paulo while shares of Brazilian financial services company XP dropped 48%.
The election also hit stocks in the U.S. and Europe with significant exposure to Brazil. In New York, shares in fintech Nu Holdings fell 17%, while e-commerce group MercadoLibre fell 7.8%.
Investors are bracing for more volatility as Bolsonaro has refused to concede. In 2022, Jair Bolsonaro also refused to accept his defeat by da Silva, which rattled some foreign investors.
How asset prices move next will likely depend on policy statements, Goldman Sachs economists said. And da Silva’s choices for cabinet posts matter, too.
“For investors, first and foremost would be who would lead the Ministry of Finance,” Goldman’s Alberto Ramos and Panteleymon Semka said.
Investors will pay attention to spending plans.
Neither political camp gave very detailed proposals on that front, said Thomas Haugaard, portfolio manager at Janus Henderson Investors.
“A thorough, transparent accounting of the fiscal cost of campaign measures/promises—and of the revisions and adjustments required for the 2027 budget—is also essential,” the Goldman economists said. “Fiscal sustainability remains the primary pricing anchor for Brazilian sovereign risk.”
The economists expect modest measures to contain primary spending growth, and higher taxes.
“The administration would likely retain its strong belief that the public sector and state-owned enterprises should remain central engines of growth and investment,” they said.