Brazil's financial markets reel at Lula's fourth-term win ... São Paulo stock market triggers circuit breaker

[Financial News]  

Brazil's financial markets plunged on the 26th (local time) after President Luiz Inácio Lula da Silva defied expectations by winning a fourth term. Investors who had been encouraged by Senator Flávio Bolsonaro's victory in the first-round vote on the 4th and bet on his election were caught out.
According to The Wall Street Journal (WSJ), the Brazilian real fell more than 10% against the U.S. dollar, while the Bovespa index plunged nearly 17%. It was the biggest one-day drop on record, and a circuit breaker was triggered, temporarily halting trading.
Global investors had been buying into Brazil's financial markets in recent weeks, betting on Bolsonaro's victory. Bolsonaro is the son of former President Jair Bolsonaro, who is currently imprisoned and nicknamed the “Trump of South America.”
With polls predicting that Bolsonaro would also win the runoff on the 25th, investors bought into the market expecting deregulation and greater market openness, only to be caught out.
ING head of market research Chris Turner said, “Everyone was taken by surprise today,” adding, “That was because the prevailing view was that Bolsonaro's victory would have a positive impact on Brazil's financial markets.”
Thierry Wizman, a global foreign-exchange and interest-rate strategist at Macquarie Group, said investors who had expected fiscal consolidation if Bolsonaro took office now see Brazil's market outlook over Lula's four-year term as a muddy quagmire where they cannot see even an inch ahead.
Lula promised large-scale government spending during this election campaign. He said he would reduce the number of workdays per week without cutting wages and forgive the debts of households struggling under heavy debt. He also promised to make public transportation free on weekends. These measures are intended to strengthen support among the poor, his political base. The fiscal deficit is now likely to balloon.
Brazilian government bonds issued in overseas markets came under selling pressure on the day. Yields, which move inversely to prices, on U.S. dollar-denominated bonds maturing in 2030 surged from 6.796% on the 23rd to 7.032% that day.
Shares in state-owned oil company Petrobras plunged more than 10%, while shares in Brazilian financial firm XP were cut in half.
U.S. and European stocks with significant exposure to Brazil were also hit.
On the New York stock market, fintech company Nu Holdings plunged 21%, while e-commerce group MercadoLibre fell 10%.
Santander, Spain's largest bank, fell nearly 4%.
Bolsonaro's refusal to accept the election result is also adding to investor anxiety. He said the two-hour extension of voting hours had cost him his victory and announced plans to take the matter to court. In the previous election, in 2022, his father, Jair Bolsonaro, also refused to accept his defeat to Lula, unsettling investors.
Goldman Sachs sees policy announcements, including cabinet appointments, as a key factor that will shape the market's direction going forward. Investors are especially keenly watching the appointment of the finance minister.

[email protected] Song Kyung-jae Reporter