Brazil stock market to crash today? What Lula’s surprise victory in elections means for emerging markets, commodities

Analysts warn of a potential sharp selloff in Brazil’s stock market after incumbent President Luiz Inácio Lula da Silva won a historic fourth term, dashing hopes of a change in government amid mounting fiscal concerns.

Lula defeated right-wing Senator Flavio Bolsonaro, Brazil’s electoral court said on Sunday. This came as a surprise as the election results defied polls, precedent and global anti-incumbent sentiment. His opponent Bolsonaro, who is the eldest son of convicted former President Jair Bolsonaro, refused to accept his defeat and said he will ask for the result to be annulled due to a Sunday ruling from a Supreme Court justice that extended voting for two hours.

Also read | Brazil election 2026: Flavio Bolsonaro refuses to concede, says he will seek annulment of vote after Lula's win


However, the markets have already begun reacting to the election outcome. Tokyo-listed Brazilian stock exchange-traded fund, the Nomura NF Ibovespa Link ETF, which is an ETF tracking Brazilian equities, tumbled as much as 16% in Japan, the most intraday since 2020. November futures for the Brazilian currency, real, were tumbled 10% in Asian hours.

The Brazilian stock market had sharply moved higher recently, anticipating a shift to the right regime since Bolsonaro unexpectedly finished first in the opening round three weeks back. Brazil’s benchmark index Ibovespa jumped 12% in the past month. The country’s currency also strengthened, with real jumping nearly 5% against the US dollar. Interest-rate futures had signalled expectations that tighter public finances by the right regime would allow borrowing costs to decline.

Why Lula's victory dampened investor sentiment?

Lula aims to present a budget surplus before interest payments of around 1.3% of gross domestic product by 2030. That would leave money to cover ⁠part of the interest bill, reducing the need for fresh borrowing. But public debt already exceeds 82% of GDP, while pensions and other legally required spending limit where savings can come from.

Bloomberg reported that the country’s household delinquencies are at a record high, millions of firms are behind on payments and farmers are defaulting at an unprecedented pace. The government itself has very little room to maneuver, with public debt above 80% of GDP and a budget that is largely tied up in mandatory spending, the report added.

Also read | 'Brazil is no one's backyard': Re-elected Brazilian president Lula da Silva

The market began doubting Lula’s commitment to control the fiscal deficit in late 2024. A selloff sent the real to a record low and affected everything from stocks to local-currency debt and dollar bonds.

Will Brazil's stock market crash today?

Analysts expect Brazil’s stock market to see a sharp crash on Monday as election results went against investor expectations of a regime change and thereby a prospective fiscal overhaul. Bloomberg cited trading-desks across Sao Paulo as saying that they expect the selling to be so intense Monday morning, and the declines so severe, that circuit breakers may be triggered.

It also quoted brokerage firm Monte Bravo as estimating the benchmark Ibovespa stock index to tumble 11% in the first hour of trading after Lula’s victory. A Citigroup Inc. survey of 73 investors published Friday showed that most expected the poll outcome to send Brazil’s currency down at least 5%, with swap rates rising more than 1% point as traders scrap the bets on interest-rate cuts that they had piled into after Bolsonaro surged past Lula in the first-round vote earlier this month.

Notably, a circuit break is triggered when the Ibovespa stock index tumbles 10% or more, halting trading for 30 minutes. In case losses deepen to 15% after market resumes, it is suspended for another hour, while a 20% decline allows exchange operator B3 to determine how long trading should remain halted.

For Brazil’s derivatives market, there are no circuit breakers but trading limits that restrict such massive price moves. For swap rates, there is a 90-basis-point trading band in both directions, while currency futures can move 6% up or down. In each case, once that limit is reached, trading is virtually stopped and the exchange needs to authorise a wider band.

The last time Brazil’s stock market triggered a circuit breaker was in 2020, at the onset of the COVID-19 pandemic, when global markets suffered a massive selloff.

"We expect a sharp market reaction on Monday, with aggressive repricing, a selloff in assets and interest rate futures likely to hit their upper limit shortly after the open," Reuters quoted Luis Felipe Vital, head of macro strategy at Warren Investimentos, as saying.

Also read | Lula beats Trump-aligned Bolsonaro in Brazil Presidential election: What happens next for US ties and the Amazon

Investors want a clear and credible commitment to fiscal discipline, the report quoted Alejo Czerwonko, chief investment officer for emerging markets at UBS Global Wealth Management. "We expect the rally that followed the ‌first ⁠round to be largely priced out, and sentiment to stay weak until a clear fiscal plan emerges."

Soybean futures crash, emerging markets in focus

Chicago soybean futures fell to a two-month low after Lula’s surprise win raised expectations to closer ties with China, which in turn can erode US share of the world’s biggest soybean import market. The most-actively traded contract on the Chicago Board of Trade dropped as much as 1.7% to the lowest since August 26 this year.

Notably, Brazil is a key emerging market and a peer to India's Dalal Street. Back home, the market continues to see a persistent FII selloff amid multiple headwinds including elevated oil prices. Sensex and Nifty today have snapped a four-session losing streak to move into the green.

Meanwhile, the global market sentiment remained muted. South Korea's Kospi and Japan's Nikkei slipped into the red. Wall Street futures are currently in the green, signalling a positive start for the American stock market later today.

Disclaimer: This article has been written by Debaroti Adhikary, who is not a SEBI-registered Research Analyst or an Investment Adviser. Debaroti Adhikary and his/her ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.