Wall Street forecasts divergent market moves depending on Brazil's election outcome
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Analysts say a Bolsonaro win could boost Brazilian bonds, currency and equities, while a Lula victory may keep rates higher, highlighting the market’s split expectations ahead of the first-round vote.
Wall Street is preparing for markedly different market reactions to Brazil’s presidential election, which will hold its first round on Sunday. Analysts note that the direction of Brazil’s bonds, currency and equity markets hinges on whether left-wing former president Luiz Inácio Lula da Silva or right-wing candidate Flávio Bolsonaro, son of former president Jair Bolsonaro, secures a majority.
"The Brazil trade is: Does Lula win or does Bolsonaro win?" said Fernando Marengo, chief economist at Black Toro Global Investments.
If Bolsonaro were to win, investors anticipate a rally in Brazilian assets. JPMorgan observed that the MSCI Brazil index has risen an average of 0.25% on days when Flávio Bolsonaro’s poll numbers improve. Prediction-market data from Kalshi shows a 60% probability for Bolsonaro versus 39% for Lula, though such markets are not permitted in Brazil and may not reflect local sentiment. Aurora Macro Strategies senior advisor Richard Lapper cautioned that the shift toward Flávio in recent weeks is not as pronounced as the prediction market suggests.
Bolsonaro is viewed favorably by markets because of his pledge to impose stricter fiscal discipline, a need highlighted by Brazil’s debt-to-GDP ratio of 81.9%, which has risen 10% since Lula took office. Leonardo Porto, Brazil head economist for Citi, said a 3-3.5% fiscal adjustment is required to stabilise public debt, emphasizing that the adjustment must be permanent rather than reliant on one-off measures such as asset privatizations.
JPMorgan points to reforms enacted under Jair Bolsonaro’s administration, including pension changes that introduced minimum retirement ages of 65 for men and 60 for women. During that reform period, Brazil’s two-year yields fell to around 4.7% and the equity market gained roughly 130%. The firm projects that a similar reform agenda under Flávio Bolsonaro could lower interest rates to a neutral real level of 6% (10% nominal) and raise the MSCI Brazil index by 21%-41%, with forward price-to-earnings ratios potentially climbing from 8.6 to as high as 13.3.
Currency expectations are described as “bimodal”: the USD/BRL rate could move to 5.50 if Lula wins, versus 4.90 under a Bolsonaro victory. The composition of Brazil’s lower house and one-third of the upper house, also decided in the election, will influence the feasibility of any reform agenda.
Marengo referenced recent gains in other Latin American markets after pro-business electoral wins, citing risk-premium compression in Colombia and strong stock performance in Peru, while noting that some of the anticipated upside may already be priced in.
Analysts also warned that rising global interest rates and the El Niño weather pattern, which could affect agricultural exports, remain key risks for Brazil and the broader region.