Brazil's Stocks Crash 14% and Its Currency Has Worst Day Since 1999 After Lula's Runoff Win

Brazil's money markets gave their verdict on Sunday's presidential runoff the moment they opened Monday. The country's main stock index, the Ibovespa, fell so fast that the São Paulo exchange halted all stock trading for 30 minutes. By the close it was down 13.88%, at 176,608 points. That is its worst day since March 16, 2020, when COVID shut down the world.

The currency did no better. The U.S. dollar jumped 8.2% against Brazil's real, closing at R$5.40 after touching R$5.60. Folha de S.Paulo reports it was the dollar's biggest one-day gain since January 1999, the month Brazil let its currency float.

The trigger: President Luiz Inácio Lula da Silva was declared the winner of a fourth term, with 51.79% of valid votes to 48.21% for Sen. Flávio Bolsonaro, a margin of about 4.4 million votes. Investors had bet the other way.

The bet that unwound

Flávio, son of former President Jair Bolsonaro, finished first in the Oct. 4 first round. On the next trading day, the Ibovespa rose 7.7%. Investors were betting a Bolsonaro government would rein in spending and make room for lower interest rates. On Friday, the last session before the runoff, the index closed at 205,083.

Monday erased all of it. The index ended below where it stood on Oct. 2, the last trading day before the first round.

How bad it got. At its low, the Ibovespa was down 17.34%. The exchange operator, B3, said the 30-minute halt kicked in after a 10% drop from Friday's close, the first such halt in more than six years. It also widened the daily limits on index and dollar futures, twice in each case. Trading volume hit R$88.6 billion, about three times a normal day, Exame reported. Of the index's 76 stocks, 68 fell.

Banks and stores took the worst of it

The heaviest losses hit companies that depend on Brazilian shoppers and Brazilian credit. Retailer Magazine Luiza lost 58.23% of its value in a day. Truck rental firm Vamos fell 56.79% and health insurer Hapvida 54.93%. State-run Banco do Brasil fell 27.31%, and state oil giant Petrobras lost 8.18% on its preferred shares, g1 reported from B3 closing prices.

The only winners were exporters that earn dollars. A weaker real makes every dollar of their sales worth more at home. Pulp maker Suzano rose 10.08% and plane maker Embraer 8.89%.

The government pulled its own bond sales

The damage reached Brazil's government debt, too. The National Treasury canceled two bond auctions set for this week: inflation-linked bonds on Tuesday and fixed-rate bonds on Thursday. It also bought back about R$7.1 billion of fixed-rate bonds in an emergency auction to calm the market, Reuters reported.

The cost of insuring Brazil's debt against default jumped. Five-year credit default swaps rose to 151.67 basis points from 120.21 on Friday, according to S&P Global Market Intelligence data cited by Reuters.

Borrowers could pay next. Before the runoff, traders saw a near-certain cut to the central bank's 13.75% benchmark rate next week. By late Monday morning, futures priced roughly a 75% chance of a hike instead, Reuters reported.

A result still being questioned

Wall Street's message is about Lula's spending. But the vote count itself is not settled for everyone. One minute after polls closed at 5 p.m. Sunday, Supreme Court Justice Cristiano Zanin, Lula's personal lawyer before Lula put him on the court in 2023, ordered two more hours of voting nationwide. The president of Brazil's election court, Kassio Nunes Marques, said afterward that "no regulation authorized any extension" and that it had never happened in the court's history.

Flávio has refused to concede and says he will ask for the election to be annulled. The election court has not published how many votes were cast in those two extra hours.

What's next

Brazil's central bank meets next week, and the Treasury says it is watching market conditions. Monday's numbers mean that whatever Lula's fourth term brings, Brazilians start it with a weaker currency, pricier loans and a stock market worth far less than it was on Friday.