Brazil’s stock market has its worst day since 2020 after Lula’s win

What happened

On Monday 26 October, the first trading day after Luiz Inácio Lula da Silva won a fourth term, Brazil’s main stock index, the Ibovespa, fell 13.88% to about 176,600 points. It was the index’s biggest one-day fall since March 2020. Within five minutes of the open the index was down more than 10%, which automatically halts trading on Brazil’s exchange for 30 minutes. That “circuit breaker” had not been triggered since the pandemic crash of 2020. At its lowest, the index was down 17.3%.

The dollar rose 8.25% against the real, to about 5.40 reais, from about 4.99 before the vote. Not every share fell: retailer Magazine Luiza lost 58%, while pulp producer Suzano rose about 10%.

Some charts shared widely on Monday showed a fall of more than 18%. Those came from contracts quoted by brokers in thin trading before and around the open, not from the official index.

Why the fall was so big: a crowded bet

Flávio Bolsonaro led the first round, and investors expected a government more likely to cut spending. They bought Brazilian shares and the real in the weeks before the runoff: after the first round, the dollar fell more than 4% against the real in a single day, and the Ibovespa closed at about 205,100 points on the Friday before the vote.

When the result went the other way, all of those positions had to be unwound at once. Markets move most not when news is bad, but when it is different from what prices already assume. Much of Monday’s fall was the market taking back the gains it had made on the expected result.

Why Brazil’s debt makes it worse

The IMF estimates Brazil’s government debt at about 97% of GDP and its budget deficit at about 8% of GDP. With the central bank’s rate at 14%, most of that deficit is interest. Investors worried about the public finances demand a higher return to lend to the government for longer: on Monday morning, interest-rate futures for 2031 and 2033 jumped by around 2 percentage points.

Higher long-term rates hit shares twice. They make future profits worth less today, and they raise borrowing costs for companies and households. That is why firms that depend on Brazilian shoppers and on credit fell hardest.

Why one share fell 58% and another rose 10%

A weaker real cuts both ways. A retailer like Magazine Luiza sells in reais, to Brazilian households who now face higher interest rates, and it pays more for imported goods. An exporter like Suzano sells pulp abroad in dollars: each dollar it earns is now worth about 8% more in reais, while most of its costs stay in reais.

Where it sits in the chain

This is politics feeding into a country’s risk premium: the extra return investors demand to hold its assets. That premium shows up at once in the currency and in long-term interest rates, and from there in share prices and, over time, in the cost of credit for the whole economy.

What to watch

• Who Lula names to run the economy, and any commitment on spending rules. Investors say this will decide whether Monday’s move lasts or partly reverses.
• Whether the real keeps weakening. A cheaper currency makes imports dearer and could push inflation up.
• The central bank’s next decision on the Selic rate, now 14%.