Brazil's stock market plunged more than 17% after the reelection of President Luiz Inácio Lula da Silva. This marked the first circuit breaker activation since the COVID-19 pandemic, causing significant turmoil in the financial markets, including a sharp decline in the value of the real.
On October 26, the Bovespa index, Brazil's main stock index, fell by 17.34% during trading, reaching 169,516.43. It later recovered slightly, closing down 13.88% at 176,608.23. This represents the largest single-day drop since March 2020, when the pandemic began.
In response to the steep decline, the Brazilian stock exchange activated a circuit breaker, halting trading for 30 minutes. This mechanism is triggered when the index drops more than 10% from the previous trading day, and it had not been used in approximately six years and seven months.
The foreign exchange market also experienced significant fluctuations. The exchange rate for the real against the U.S. dollar surged to 5.605 reais per dollar during trading, before settling around 5.40 reais, reflecting an increase of over 8% from the previous day.
The shockwaves from the stock market were felt in the bond and interest rate futures markets as well. Rising market interest rates increased the Brazilian government's borrowing costs. Consequently, the Brazilian Treasury canceled auctions for inflation-linked and fixed-rate bonds scheduled for October 27 and 29, while proceeding with the auction for bonds linked to the benchmark interest rate.
This market downturn is attributed to the unexpected results of the presidential runoff election held the previous day. Lula secured reelection with 51.79% of the vote, defeating Senator Flávio Bolsonaro, who garnered 48.21%. Following the first round of voting, where Bolsonaro led, there had been increased expectations for fiscal tightening, resulting in a 7.70% surge in the Bovespa index and a strengthening of the real.
However, with Lula's reelection confirmed, concerns among investors grew regarding increased government spending and rising national debt. Analysts suggest that the market adjusted asset prices that had been based on expectations of Bolsonaro's victory, leading to a concentrated sell-off.
Global investment banks have also lowered their outlook for Brazil's financial markets. JP Morgan downgraded its investment recommendation for the Brazilian real and local currency-denominated bonds from 'overweight' to 'neutral' immediately following Lula's reelection, citing the need for asset price adjustments due to the unexpected election outcome.
Local investment bank BTG Pactual anticipates that selling pressure may continue in the coming weeks, raising concerns about potential declines in corporate earnings due to the weakening real and rising interest rates.
Daniel Telles, a partner at investment firm Valor Investimentos, warned that increased government spending and subsidy-like loan policies could elevate the national debt-to-GDP ratio, likely exerting sustained upward pressure on both the benchmark and market interest rates.
* This article has been translated by AI.
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