[Edaily Reporter Kim Kyeo-Re ] With Brazilian President Luiz Inácio Lula da Silva defeating right-wing candidate Flávio Bolsonaro in the presidential runoff election, Brazil’s financial markets are expected to face selling pressure. Observers predict that stocks, bonds, and the Brazilian real could all weaken as investors are likely to liquidate positions they had built on the assumption that Bolsonaro would win.

According to Bloomberg on the 25th (local time), exchange-traded funds (ETFs) tracking Brazilian stocks traded in Japan plummeted 16% during the trading session. Prices for Brazilian real-related derivatives on the Chicago Mercantile Exchange (CME) stood at 5.60 reais per dollar, suggesting the possibility that the real could lose more than 10% of its value compared to the closing price on the 23rd. However, derivative prices do not necessarily reflect the spot exchange rate.
Brazilian securities firm Monte Bravo projected that if Lula wins, the Ibovespa—Brazil’s main stock index—could fall 11% during the first hour of trading. In a survey of 73 investors conducted by Citigroup, the majority predicted that the real would depreciate by at least 5%.
There is speculation in the market that a circuit breaker could be triggered immediately after the Brazilian stock market opens. Trading on the Brazilian stock market is suspended for 30 minutes if the Ibovespa index falls by 10%. If the decline reaches 15%, trading is suspended for an additional hour. The last time a circuit breaker was triggered on the Brazilian stock market was in 2020, when global financial markets plummeted due to the spread of COVID-19.
According to Brazilian election authorities, with vote counting nearly complete, Lula has secured 51.8% of the vote, edging out Bolsonaro, who received 48.2%. Bolsonaro has contested the results, arguing that the Supreme Court changed election rules by deciding to extend voting hours. Political conflict surrounding the election results is also a factor fueling financial market instability.
When Bolsonaro won the first round of voting earlier this month, investors expected that fiscal austerity would pave the way for interest rate cuts. Subsequently, foreign capital poured into Brazilian assets, and global investment banks issued a series of bullish forecasts. However, Lula’s comeback victory dashed those expectations, making it inevitable that investors would reverse their bets on interest rate cuts.
The key variable the market is watching is fiscal soundness. Brazil’s public debt exceeds 80% of gross domestic product (GDP), and a significant portion of the government budget is tied up in mandatory spending. Concerns have persisted that the Lula administration will prioritize stimulating consumption and expanding credit while taking a passive approach to reducing the deficit.
Bruno Funchal, CEO of Bradesco Asset Management, said, “The market will reevaluate the prices of all assets,” adding, “Everyone is taken aback by this unexpected result.” Cathy Hepworth, Head of Emerging Markets Bonds at PGIM, predicted, “Given that interest rates have fallen quite sharply recently, this outcome will trigger a much more significant price revaluation,” adding, “The correction could last for some time.”