Lula's Upset Victory Shocks Stocks and Currency... Brazil ETF Plunges 16% Intraday

Lula Wins Presidential Election, Defeating Bolsonaro
Brazil's Fiscal Burden Already Substantial
Stocks and the Real Likely to Give Back Gains

Brazilian President Luiz Inácio Lula da Silva pulled off an upset victory in the presidential runoff on October 25 (local time), sending financial markets, which had been betting on a win by right-wing candidate Flávio Bolsonaro, into shock.

Real Futures Also Plunge 10%

Brazilian President Luiz Inacio Lula da Silva, who won Brazil's presidential election on the 25th (local time), is surrounded by supporters. AP-Yonhap News.

According to foreign media outlets including Bloomberg, a Brazil-focused exchange-traded fund (ETF) listed on the Japanese stock market fell 16% intraday on October 26 from the previous trading day. This was its largest intraday drop since 2020. Brazilian real futures traded on the Chicago Mercantile Exchange (CME) in the United States plunged about 10%. The exchange rate implied by futures prices was around 5.60 reais per dollar, signaling the possibility that the real could lose more than 10% of its value.

Brazil's stock market was also widely expected to be affected. Local brokerage Monte Bravo estimated that, if President Lula won, the Ibovespa, Brazil's benchmark stock index, could fall 11% in the first hour of trading. The São Paulo Stock Exchange will open on the morning of October 26 (10 p.m. Korea time).

The Ibovespa rose about 7% between October 4, just before the first round of the presidential election, and October 23. The index strengthened as Bolsonaro moved ahead of President Lula. Investors expected Bolsonaro to cut fiscal spending and curb government debt, creating conditions for interest rate cuts. Major investment banks, including UBS Global Wealth Management, Morgan Stanley, JPMorgan Chase and Citigroup, also issued optimistic outlooks for Brazilian assets.

President Lula received 51.8% of the vote in the runoff, defeating Bolsonaro, who received 48.2%, and securing a fourth term in office overall. Bolsonaro is seeking to have the result annulled, claiming that the Supreme Court changed the election rules at the last minute by extending voting hours.

Market Worries That Improvements in Brazil's Fiscal Health Will Be Delayed

Brazilian President Luiz Inacio Lula da Silva campaigns at a regional rally on Aug. 28 (local time). He was elected Brazil's next president on the 25th. AP-Yonhap News

Markets are concerned that President Lula's return to office could delay improvements in the country's fiscal health. In a recent survey of 73 investors by Citigroup, a majority forecast that the real would fall at least 5% and swap rates would rise by more than 1 percentage point if Lula won.

Brazil's fiscal burden is already substantial. Public debt exceeds 80% of gross domestic product (GDP), and most of the government budget is tied up in mandatory spending. With household delinquency rates at record highs and corporate and agricultural defaults increasing, the burden of high interest rates is spreading throughout the economy.

Since returning to office in 2023, President Lula has focused on growth through increased consumption and credit supply. However, investors have said that he has not offered concrete measures to rein in the fiscal deficit. There are concerns that interest rate cuts could also be delayed if the Brazilian government fails to sufficiently curb spending.

Some analysts say, however, that whether the shock to financial markets will persist depends on future fiscal policy. "There could be a substantial repricing following the election result," said Kathy Hepworth, head of emerging markets debt at PGIM, an asset manager affiliated with U.S. financial services company Prudential Financial, which manages $1.5 trillion in assets. "But Lula is a politically skilled figure, so the situation will ultimately stabilize," she forecast.

"It's going to be a tough day. The market will reprice everything," Bruno Funchal, CEO of Bradesco Asset Management, told Bloomberg. "Everyone is trying to understand what happened with an outcome no one expected."

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