São Paulo stocks jump 8% and the real firms after Bolsonaro's first-round win

Brazilian markets rallied sharply on Monday in response to the first round of the presidential election, in which Senator Flávio Bolsonaro finished ahead of President Luiz Inácio Lula da Silva, contrary to what polls had predicted. The São Paulo Stock Exchange's Bovespa index rose as much as 8% in early trading, above 208,000 points.

Banks led the rally. In New York, before the open, Bradesco's depositary receipts were up 15.2%, Itaú's 14.4%, Nu Holding's 12.2%, Petrobras's 10.3% and Vale's 6.4%. The real gained 1.4% against the dollar, which traded at 5.14 reais.

Bolsonaro won 47% of valid votes to Lula's 45%, and the two will face each other in the October 25 runoff. Investors see the Liberal Party senator as more likely to push through fiscal tightening that would allow high interest rates to come down; Lula avoided committing to spending cuts and expanded social programmes in the final stretch of the campaign. “The market wants change, it wants reforms, it doesn't want a large public deficit,” Pedro Galdi, an analyst at AGF Investments, told Reuters.

Not all assessments were unconditional. Bryan Harris, a partner at political risk consultancy Sabio, warned that the market would look for “clear signals” that Bolsonaro is “serious” about tackling the country's problems, and said the senator had shown little aptitude for economic policymaking.

Precedent suggests caution. Four years ago, the real gained more than 4% and the Bovespa rose 5.5% the day after Jair Bolsonaro outperformed expectations in the first round; weeks later he lost the runoff to Lula.

The Bovespa had already risen 5% in dollar terms in September as the senator's prospects improved, despite reports about his ties to Daniel Vorcaro, former owner of Banco Master, who has been arrested and charged with fraud. Flávio Bolsonaro is under investigation for alleged money laundering in that case, without formal charges, and denies any wrongdoing.