Analysts Warn of Sharp Brazilian Market Selloff Following Lula’s Election Victory

Oct 26 (Reuters) – Brazilian financial markets were poised for a sharp selloff on Monday following President Luiz Inácio Lula da Silva’s victory over incumbent Jair Bolsonaro in the presidential runoff, according to analysts across major financial institutions.

Equities had surged to a record high after the first round of voting earlier this month, when a stronger-than-expected showing by Bolsonaro fueled investor optimism for continued fiscal discipline and pro-business reforms. That sentiment reversed dramatically as Lula’s win became apparent.

Barclays analysts predicted “disorderly moves” in local assets, forecasting the dollar-real (USDBRL) could initially jump to the 5.50 range. They noted markets will focus intently on the Ministry of Finance appointment and policy signals regarding the campaign’s promised spending increases. The analysts warned that Brazilian sovereign bonds could sell off by roughly 300 basis points in the coming days, mirroring the volatility seen after the 2022 election when cabinet announcements signaled looser fiscal policy. They added that while markets typically look past contested election noise, headlines could flare if any annulment proceedings were discussed.

ING strategist Chris Turner in London echoed the bearish outlook, expecting Brazilian assets to be “hit hard.” He projected USD/BRL gapping 5-7% higher at the open to the 5.20-5.25 area, with the Bovespa equity index facing double-digit losses. Turner cautioned that moves could amplify if the external environment deteriorates and U.S. Treasury yields spike, highlighting Brazil’s fiscal vulnerability—specifically a 7-8% budget deficit and a 70% net debt-to-GDP ratio. He emphasized that the speed of Bolsonaro’s concession, or at least his allowance for the constitutional process to proceed, would be critical for market calm, recalling the 44-hour period in 2022 before the elder Bolsonaro accepted defeat.

JPMorgan analysts warned that circuit breakers were likely to trigger on Monday. A 10% decline in the Ibovespa halts trading for 30 minutes; a 15% drop triggers an additional one-hour pause; and a 20% decline gives the B3 exchange discretion to suspend trading for the day. They expected at least the first threshold to be breached. Sector-wise, domestic cyclicals were seen falling sharply, while exporters should outperform on currency weakness. JPMorgan also cut its view on Brazilian government bonds to “underweight,” citing the country’s spread outperformance versus BB-rated peers and a heavier reliance on Eurobond financing, leaving sovereign credit exposed to a meaningful correction unless market pressure forces fiscal concessions.

Aviva Investors Senior Portfolio Manager Kurt Knowlson anticipated a negative market reaction, noting that measures announced by the Lula administration ahead of the second round have raised the starting point for necessary fiscal consolidation. He argued that Brazilian real weakness and higher long-end and real rates would again be required to enforce discipline, unless a credible fiscal path is announced swiftly.

Capital Economics analyst William Jackson concluded that Lua’s surprise second-round win dashed hopes for reforms to improve public finances and strengthen growth. He forecast a sharp fall in the real and equities, alongside a rise in bond yields, more than reversing the rally seen since the first-round vote.

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