Traders braced for steep losses across Brazilian markets Monday after President Luiz Inácio Lula da Silva defeated right-wing candidate Flávio Bolsonaro in a stunning election comeback. An ETF tracking Brazilian equities tumbled up to 16% in Japan, the steepest intraday drop since 2020, and currency derivatives showed the real at 5.60 per dollar, implying a more than 10% plunge from Friday's close. Monte Bravo estimated the benchmark Ibovespa stock index could fall 11% in the first hour of trading, triggering circuit breakers.
A Citigroup survey of 73 investors found most expected the currency to drop at least 5% with swap rates rising over 1 percentage point. Lula won 51.8% of the runoff vote against Bolsonaro's 48.2%. The combination of disappointed market expectations and political dispute risk weighs on equities, bonds and the real.
Investors had positioned for a Bolsonaro victory hoping for fiscal tightening, but Lula is seen as unlikely to pursue the austerity needed to lower rates. Bruno Funchal of Bradesco Asset Management, managing 1.1 trillion reais ($221 billion), called it a tough day where the market will reprice everything. Anna Wu of Floodlines Research noted the post-first-round rally is being handed back almost in one move.
Circuit breakers trigger at 10% Ibovespa declines, with suspensions up to 90 minutes for 15% drops and potential halts for 20% declines. Derivatives markets have trading limits of 6% for currency futures and a 90-basis-point band for swap rates.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing