"No More Left-Wing Support" Stock Market Soars to Record High on Right-Wing Upset... What Is Happening in Brazil?

‘Bolsonaro Surge’ Sends Brazilian Stock Market to Record Highs
Financial Markets Cheer on Expectations of Fiscal Austerity and Tax Cuts

When right-wing candidate Flavio Bolsonaro of the Liberal Party (PL) unexpectedly took the lead in the first round of Brazil’s presidential election, the Brazilian financial market reacted explosively. As expectations for market-friendly policies and fiscal soundness spread, the nation’s main stock index soared by 7.7% in just one day, setting a new all-time high. Both the Brazilian real and US-listed Brazilian stocks surged simultaneously.

Ipanema Beach, Brazil. Trip.com

‘Right-Wing Surge’ Upends Polls... Public Discontent over Inflation and Livelihood Drives ‘Regime Change’ Sentiment

According to Bloomberg News on the 5th (local time), Bolsonaro received 47.03% of the vote in the first round of the Brazilian presidential election held on the 4th, surpassing incumbent President Luiz Inacio Lula da Silva, who received only 45.16%, by about 2 percentage points. This is a major upset that completely overturned predictions by leading polling organizations, which had forecast a narrow advantage for President Lula.

Analysts point out that voters’ strong dissatisfaction with accumulated economic mismanagement and public security concerns is at the root of President Lula’s unexpectedly poor performance. In fact, since the launch of Lula’s third administration in 2023, the annual consumer price inflation has remained around 5%, consistently exceeding the central bank’s target of 3%. At the same time, total public debt soared to 81.9% of gross domestic product (GDP). It is believed that the urban middle class burdened by high living costs and household debt, particularly in the southeastern and central regions, shifted their support to Bolsonaro in search of change.

‘Bolsonaro Election Shock’ Propels Stock Market Rally... Record High Reached

The financial markets responded instantly to the election results. On the 5th, the benchmark Bovespa index on the Sao Paulo Stock Exchange closed up 7.7% from the previous trading day, finishing at 206,911.89—a new all-time high. This marks the largest daily gain in roughly 6 years and 7 months since March 2020, during the early days of the COVID-19 pandemic.

Lula (left) and Bolsonaro. Photo by Reuters and Yonhap News Agency

The foreign exchange and bond markets were also highly volatile. The value of the Brazilian real jumped by about 4–5% against the dollar, dropping below 5 reais per US dollar, while the credit default swap (CDS) premium on Brazilian government bonds fell by 20 basis points. Swap rates also plunged more than 100 basis points, significantly alleviating market concerns over fiscal risk.

Brazil-related assets listed overseas surged as well. The iShares MSCI Brazil ETF (EWZ), a flagship Brazilian ETF on the New York Stock Exchange, soared 12.57% in just one day. Local brokerage XP gained 33%, with fintech companies StoneCo and PagBank each rising over 20%, and Nubank climbing 13%. Global investment bank JP Morgan upgraded its outlook on Brazilian equities to ‘overweight’, stating that the political environment has become more favorable.

‘Fiscal Reform’ Expectations...Focus on Spending Cuts, Tax Reductions, and Privatization

The market’s enthusiastic response to Bolsonaro’s strong showing is rooted in anticipation of a shift in fiscal policy. Bolsonaro has pledged to sharply cut government spending, pursue deregulation and tax cuts, and achieve an economic growth rate of at least 4% per year. He has also expressed plans to accelerate resource development—including petroleum, gas, and the world’s second-largest reserves of rare earth elements—and to drive privatization aggressively. This stands in marked contrast to the Lula administration, which has been criticized for increasing the fiscal burden through expanded social support programs and subsidies.

There is growing hope that improved fiscal health would enable Brazil’s central bank to begin lowering interest rates from their world-high levels. Thierry Larose, a manager at Vontobel Asset Management, commented that the market does not want to see Lula’s government expand the fiscal deficit, and that expectations for more responsible fiscal management under Bolsonaro are already being reflected in asset prices.

Bolsonaro’s pro-Trump orientation also heightens market optimism. Should Bolsonaro win, it is expected that trade frictions with the US—prevalent under the Trump administration—could ease, and that the wave of conservatism known as the ‘Blue Tide’, spreading across Latin America, may gain further momentum.

Runoff on the 25th... ‘Expectations vs. Reality’ Put to the Test

Since no candidate secured an outright majority in the first round, Bolsonaro and President Lula will face off in a runoff on the 25th. Major international media, including the Financial Times (FT), note that in every Brazilian presidential election since the end of military dictatorship in the 1980s, the first-round winner has always prevailed in the runoff—boosting prospects for Bolsonaro’s victory.

However, President Lula, backed by a solid rural and labor union support base, is aiming for a dramatic comeback, meaning volatility in the financial markets is likely to persist until the runoff. Lula’s camp is reportedly considering appointing moderate Vice President Geraldo Alckmin as Finance Minister to help allay fiscal concerns.

Some analysts urge caution, suggesting that market optimism may be running ahead of itself. Bolsonaro has yet to present detailed economic roadmaps, and it will not be easy to push through actual spending cuts in Congress in the face of political resistance. For the remainder of the campaign, ongoing political uncertainty is expected to result in market turbulence and volatility.

This content was produced with the assistance of AI translation services.