Lula’s election victory sends Brazilian stocks down 17%; exchange rate and futures rates also surge

[Financial News] The unexpected presidential election victory of President Luiz Inácio Lula da Silva sent Brazilian stocks and the real tumbling, while interest rates surged. Stocks plunged nearly 14%, their steepest drop in six years.
Sell orders flooded financial markets as soon as trading opened. Lula’s reelection stoked concerns over deteriorating fiscal health, including from increased government spending, spreading selling across financial markets. Markets had been hoping for a victory by opposition candidate and senator Flávio Bolsonaro, who was more committed to fiscal tightening.
According to the Brazilian stock exchange on the 26th (local time), the Bovespa index, Brazil’s equivalent of South Korea’s KOSPI, opened down 17.00% from the previous session at 169,893 points. At one point during the session, its decline widened to 17.34%, taking it to its lowest level since June.
Authorities activated a circuit breaker as stocks showed signs of plunging, but it failed to reverse the market’s convulsion-like slide.

Foreign exchange markets were also rocked. The real’s exchange rate against the dollar surged 10.26% from the previous session, with the currency plunging in value to 5.498 reais per dollar. At one point during the session, the rate climbed as much as 12.37% to 5.604 reais, its highest level since December 2025.
The shock to financial markets quickly spread to bond and interest rate futures markets. DI (deposit rate) futures maturing in January 2027 rose 0.3 percentage points, while the rate for contracts maturing in January 2031 rose 3.07 percentage points. Selling in the government bond market was also intense. The yield on Brazil’s dollar-denominated sovereign bonds maturing in 2054 rose to 7.45%. The five-year credit default swap (CDS) premium jumped from 120.21 basis points to 151.67 basis points.
Brazil’s country risk (CDS premium) also surged 22% that day, as of 11:50 a.m. The rise in country risk means investors feel much greater uncertainty about the Brazilian government’s ability to meet its debt obligations. It worsens overseas financing conditions for the government and businesses.
Market concerns centered on Brazil’s weak fiscal position. The International Monetary Fund (IMF) projected that Brazil’s fiscal deficit would reach about 8% of gross domestic product (GDP) this year. Public debt stands at about 83% of GDP, while the benchmark interest rate is 13.75% a year.
As market volatility intensified, Brazil’s Finance Ministry abruptly canceled that day’s scheduled auctions of fixed-rate and inflation-linked government bonds. The surge in interest rate futures led investors to demand higher yields, sharply increasing the government’s costs of issuing bonds and financing its debt.
Markets feared that Lula’s continued presidency would worsen the national debt ratio through expanded subsidies and populist fiscal spending. During the campaign, President Lula made pledges requiring major government outlays, including free public transportation on weekends, personal debt relief and expanded welfare benefits.
The plunge completely reversed the rise in asset values immediately after the first round of the presidential election, in which Senator Flávio Bolsonaro came in first. The day after the first-round vote, the Bovespa index surged 7.70% and the exchange rate fell 4.11%, reflecting market hopes for fiscal tightening.

Mauricio Monje, a senior economist at Oxford Economics, said President Lula needs to build confidence in his ability to pursue sustainable fiscal adjustment while supporting real wage growth and employment.
Investors’ attention has shifted to the appointment of the next finance minister. Lula’s camp has set a target of achieving a fiscal surplus of about 1.3% of GDP by 2030, but specific plans to cut spending remain unclear.
Alejo Czerwonko, chief investment officer for emerging markets at UBS Global Wealth Management, told Reuters that investor sentiment in Brazil’s financial markets is likely to remain weak until a credible fiscal plan emerges.


Global investment bank JPMorgan downgraded its investment view on the Brazilian real and government bonds from “Overweight” to “Neutral” shortly after Lula’s election victory was confirmed. Local investment bank BTG Pactual also warned in a report that selling could continue for the next few weeks, leaving the index hovering around the 170,000 mark.
Daniel Telles, a partner at investment firm Valor Investimentos, said, “The market expects the Lula government to continue costly spending and subsidy-like spending policies, raising the national debt-to-GDP ratio,” adding, “The benchmark rate and market interest rates are likely to remain under upward pressure.”
Graham Stock, a senior sovereign strategist at RBC BlueBay Asset Management, told the FT that the plunge was a clear message from the market to make fiscal adjustment its top priority.
[email protected] Lee Seok-woo, International Affairs Correspondent Reporter