Brazilian stocks surge 7.7% as Flávio Bolsonaro leads first round

The three-arched, iron-gated entrance of the stock exchange building marked BOVESPA in downtown São Paulo — The entrance of the Bovespa (now B3) building in downtown São Paulo. Photo taken 4 February 2017 (archive photo)Photo: Wilfredor / Wikimedia Commons · CC BY-SA 4.0 · resized · Source

Location: SÃO PAULO

According to the count reported by the Rio Times, with 99.96% of ballot boxes tallied Flávio Bolsonaro had 56,098,129 votes to Lula's 53,845,563. The margin was 2,252,566 votes, or 1.89 points. A Euronews report published on Yahoo Finance gives the shares as 47.03% to 45.16%. Most pre-election polls had Lula ahead. In the final surveys compiled by TechTimes, Datafolha gave Lula a 4-point lead and BTG/Nexus a 2-point lead.

The market reaction was the sharpest one-day gain in more than six years. The Ibovespa touched 209,606 intraday on 5 October and closed above 200,000 for the first time. The real strengthened from 5.2133 per dollar on Friday to 4.9982. According to the Rio Times, the DI futures curve fell to about 12% after the vote, with the Selic policy rate at 14.00%.

The constraint behind the rally is fiscal. Data cited by TechTimes put gross public debt at 82.9% of GDP in August and the budget deficit at 9.48% of GDP. The interest bill, inflated by a high Selic, is widening the deficit. According to Euronews, Bolsonaro is promising tax cuts, a brake on debt and the privatisation of dozens of state companies. The market is pricing in a change of fiscal regime without waiting for the run-off, which raises the cost of an adverse result on 25 October.

Talay assessment

Bottom line

The market read a first-round result that defied the polls as a harbinger of fiscal discipline and priced it in without waiting for the run-off. The 7.70% jump in the Ibovespa and the real breaking below 5 turn 25 October into a binary risk event. If Bolsonaro wins, part of the rally could stick; if Lula recovers, an equally fast reversal is possible. The real test is whether a programme to narrow the 9.48% deficit gets through Congress.

Likely effects

Brazil's rate curvePositive1–6 months
The DI curve dropping to about 12% shows the market expects tighter fiscal policy and a lighter interest bill, which could widen room to cut the Selic from 14%.
Emerging market flowsUncertainWeeks
The real's sharp appreciation is drawing emerging market funds to Brazil. High-yielding markets such as Türkiye compete for the same pool of money, so relative outflow pressure could emerge.
Run-off volatilityNegativeWeeks
With the polls having missed the first round, every new survey before 25 October is likely to trigger big moves in the real and in equities.

Possibilities, ranked

1
Bolsonaro wins, pricing largely holds55%
The first-round margin holds in the run-off, the real stays below 5 and the rate curve remains low.
Watch: The 25 October run-off result and the first post-first-round Datafolha and Quaest polls
2
Lula recovers, part of the rally unwinds30%
Voters of eliminated candidates swing to Lula, polls tighten to a dead heat and the Ibovespa gives back part of its gains.
Watch: Run-off endorsements from Cury, Santos and Caiado
3
Bolsonaro wins but the fiscal programme stalls15%
The election is won, but tax cuts clash with the deficit target in Congress and the market questions the fiscal pledges again.
Watch: The DI curve's reaction to the winner's first statements on the budget and spending rules

Probabilities are calibrated judgement based on the sources, not measurement, and are revised as new information arrives. Not investment advice.

Market reaction

Indicators affected

Ibovespa (5 October close)▲ +7.70%
Real per dollar▲ 4.9982
Flávio Bolsonaro first-round vote▲ 47.04%
Brazil budget deficit / GDP▼ 9.48%

Brazilian stocks surge 7.7% as Flávio Bolsonaro leads first round

Bottom line

Likely effects

Possibilities, ranked

Sources