Brazil’s real plunges more than 8% and São Paulo stocks slump after Lula’s victory

Brazil’s real lost more than 8% against the dollar and futures on the Ibovespa index plunged 15% on Monday, in the first session after President Luiz Inácio Lula da Silva’s victory in the election runoff, a result markets had not expected. The dollar opened up 8.64% at 5.42 reais.

The fall in Ibovespa futures hit the permitted limit shortly after the open and forced a temporary halt in trading, prompting the São Paulo stock exchange, B3, to widen the daily fluctuation band to 20%. Brazil’s Treasury also cancelled the debt auctions scheduled for October 27 to 29. Brazilian assets trading abroad had anticipated the move: the exchange-traded fund of Brazilian stocks in Tokyo fell as much as 15%, according to Bloomberg. According to El País, it is the real’s steepest decline since 1999.

The sell-off reflects investors’ bets on a victory by Senator Flávio Bolsonaro after his first-round win, which on October 5 drove a 7.7% rise in the Ibovespa on expectations of greater fiscal discipline. “Markets were broadly positioned for a Bolsonaro victory,” said Eirini Tsekeridou, an analyst at Julius Baer. A Citibank survey of 73 fund managers showed 80% expected a fall of more than 5% if Lula won.

Analysts say attention will now turn to the stance of Bolsonaro, who does not recognise the result and has said he will seek to annul the election, Lula’s ability to build majorities in an opposition-dominated Congress and, above all, the make-up of his economic team. “Investors need a revised fiscal framework that generates primary surpluses sufficient to stabilise debt,” said Viktor Szabó of Aberdeen Investments. Brazil’s public debt exceeds 80% of GDP, and the ten-year bond yields around 6.5%, second in the region only to the 12% demanded on Argentine debt, according to the same analyst.