Ibovespa Set to Face Pressure After Lula’s Election Victory

The Ibovespa plunged more than 16% to below 172,000 on Monday as Brazilian assets sold off following President Lula’s victory over Flávio Bolsonaro in the presidential runoff. The decline reversed the optimism that had supported markets since the first round, when Bolsonaro outperformed polling estimates and finished ahead of Lula. Investors had widely viewed a potential Bolsonaro administration as more likely to rein in public spending, considered essential to lowering interest rates. Markets are now reassessing fiscal risks, including persistent primary budget deficits and the trajectory of public debt, as well as institutional risks surrounding the electoral process. Losses were broad-based. Petrobras sank 16%, Itaú dropped more than 15.5%, BB plunged over 31%, Itaúsa tumbled more than 16% and Axia retreated 19%. In contrast, Vale surged over 8% ahead of its earnings release after the market close. WEG gained 4% after announcing plans to acquire the PCS business of L&S Electric.

The Ibovespa’s opening was delayed on Monday after B3 triggered a circuit breaker as Brazilian assets plunged following President Lula’s victory over Senator Flávio Bolsonaro in the presidential runoff. The selloff reversed the optimism that had supported Brazilian assets since the first round, when Bolsonaro outperformed polling estimates and finished ahead of Lula. Markets had widely viewed a potential Bolsonaro administration as more likely to rein in public spending, which investors consider essential to lowering interest rates. Investors are now reassessing fiscal risks, including the persistence of primary budget deficits and the trajectory of public debt, as well as institutional risks related to controversies surrounding the electoral process. Meanwhile, Brazil’s National Treasury canceled the fixed-rate and inflation-linked bond auctions scheduled for Tuesday and Thursday, while maintaining Tuesday’s auction of securities linked to the benchmark Selic rate.

The Ibovespa is expected to face selling pressure on Monday after President Luiz Inácio Lula da Silva was re-elected on Sunday, securing 51.79% of valid votes against 48.21% for Flávio Bolsonaro, according to the Superior Electoral Court. A Tokyo-listed ETF tracking Brazilian stocks slumped 15%, its biggest one-day loss since 2008. Lula became the first candidate since Brazil’s return to direct presidential elections in 1989 to win a runoff after finishing second in the first round, defying market expectations that favored Bolsonaro following his narrow first-round lead. Meanwhile, Bolsonaro has called for the election results to be annulled. Investors now focus on fiscal risks, including rising public debt, high borrowing costs and rigid mandatory spending, as well as the government's ability to secure congressional support for fiscal adjustment and structural reforms while maintaining social spending.