Brazil's Ibovespa falls 13.9% and the real drops 8.2% after Lula wins a fourth term

Brazilian assets sold off on Monday, the first trading session after President Luiz Inácio Lula da Silva won Sunday's runoff. The Ibovespa closed down 13.88% at 176,608 points after B3, the São Paulo exchange, triggered an automatic trading halt (a circuit breaker). Brazilian outlets reported that the fall was the index's largest one-day drop since March 2020. The dollar rose 8.21% to 5.4029 reais after it touched 5.6049 in morning trading. The National Treasury canceled the inflation-linked and fixed-rate bond auctions it had scheduled for October 27 and October 29.

Lula won about 51.8% of valid votes. His opponent was Flávio Bolsonaro, the senator and eldest son of former president Jair Bolsonaro, who had led in the first round. Part of the market had positioned for a Bolsonaro victory, which investors associated with tighter spending and reform. The trading on Monday reversed that position.

The fiscal arithmetic drives the selling. MercoPress reports that Lula begins his fourth term on January 1 with faster growth than forecasters expected and record-low unemployment, but also with fiscal imbalances. Public debt has risen by more than ten percentage points during his current term to above 82% of gross domestic product (GDP), and mandatory outlays leave less than 8% of the federal budget open to adjustment. The president made no commitment to cuts during the campaign. In its final weeks he raised Bolsa Família cash transfers by 15%. The central bank had cut the benchmark Selic rate five times in a row, to 13.75%, and the new Congress leans further to the right than the last one.

Folha de S.Paulo notes that the stock market rose during each of Lula's first three terms, all of them periods of strong growth. The economists it interviewed say the challenge now is to sustain that growth without the commodity and credit conditions of earlier decades.

The political dispute adds noise but has so far not threatened the result. US President Donald Trump called the vote "rigged" and "so corrupt" and did not cite evidence. Washington imposed a 50% tariff on Brazil last year, partly over the prosecution of the elder Bolsonaro. In Brazil, Kassio Nunes Marques, president of the Superior Electoral Court (TSE) and a Bolsonaro appointee to the Supreme Federal Court, said the extension of voting hours did not change the outcome. He rejected the Bolsonaro camp's argument for annulment.