Brazilian markets plunge after Lula's reelection
Brazil's stock index fell over 15% and the real lost more than 11% against the dollar following President Luiz Inácio Lula da Silva's fourth-term victory, prompting a circuit-breaker halt.
Brazilian equities and the real experienced their steepest declines in years on Monday after President Luiz Inácio Lula da Silva secured a fourth term, reversing market expectations of a right-wing shift. The real fell more than 11% against the U.S. dollar in early trading, while the Bovespa index dropped over 15%, marking its largest percentage fall since 1998.
The sell-off extended to sovereign debt, with longer-dated bonds hit hardest; the 2054 bond yielded 7.45% after a 2.5-cent decline. Mauricio Monge, senior Latin America economist at Oxford Economics, said the result "triggered a sharp market selloff as investors reassessed the fiscal outlook under his fourth term" and added that Lula's main challenge will be to convince markets of a credible, sustainable fiscal adjustment while supporting wage growth and employment.
B3, the operator of Brazil's stock exchange, halted trading for 30 minutes after the Bovespa fell 10% from its previous close, activating the circuit-breaker mechanism. The exchange had earlier widened daily limits for futures contracts in response to heightened volatility.
Credit default swaps on Brazil's five-year debt rose to 151.67 basis points from 120.21 the day before, according to S&P Global Market Intelligence. In reaction, the Treasury cancelled its scheduled inflation-linked and fixed-rate bond auctions for late October.
The real was down 8.3% to the dollar at 5.4274, and raw sugar prices slipped 5.6% as the currency weakened. Analysts noted that the market had previously rallied on expectations of a right-leaning government after Senator Flávio Bolsonaro led the first round of the presidential race. Chris Turner, strategist at ING, said the speed of Bolsonaro's acceptance of the result would be important for local markets.
Market participants now focus on Lula's upcoming finance-minister appointment and its implications for fiscal policy. Graham Stock of RBC BlueBay highlighted the need for a clear commitment to fiscal discipline, while Thierry Larose of Vontobel warned that investors doubt any consolidation will be sufficient to restore debt sustainability. Alejo Czerwonko, chief investment officer for emerging markets at UBS Global Wealth Management, said investors seek a credible fiscal plan to stabilize public debt. The president’s team has indicated a target budget surplus of about 1.3% of GDP by 2030, though details on spending cuts remain unspecified.