Four years ago, Brazil’s markets had a Monday a lot like this one. Jair Bolsonaro, then president, beat the polls in the first round of the 2022 election. The next day the Brazilian real jumped more than 4% and the main stock index rose 5.5%. Four weeks later, he lost the runoff to Luiz Inácio Lula da Silva, 49.1% to 50.9%. This week his eldest son, Flavio Bolsonaro, gave markets the same kind of Monday, only bigger.
On Oct. 4, Flavio, a 45-year-old senator, finished first with about 47% of valid votes. Lula, the sitting president, got about 45%, according to NPR. Polls had shown Lula ahead by roughly three points, Reuters reported. Because nobody passed 50%, the two meet again in a runoff on Oct. 25.
Here is how markets reacted on Oct. 5:
- The Ibovespa, Brazil’s benchmark stock index, closed at a record 206,912, up 7.7%. It was its first close above 200,000.
- The real gained about 4%, moving from roughly 5.22 to under 5 per U.S. dollar.
- Banks, retailers and the stock exchange operator B3 led the rally. Some of those shares rose more than 20%.
- On the prediction markets Polymarket and Kalshi, Flavio Bolsonaro’s chance of winning the runoff was priced at about 83%.
Why are investors so happy? Mostly because of government spending. Brazil runs large budget deficits, and its central bank keeps interest rates very high partly because of them. Flavio campaigns on cutting the deficit and moving foreign policy closer to Washington. Lula has spent heavily ahead of the vote, including a plan in which Brazil will buy $28 billion of household bad debt. Less spending would give the central bank room to cut rates. Lower rates push bond prices up, and they usually help stocks too.
Now back to 2022. A first-round rally is a guess about the runoff, not the result. That year, the guess was wrong. But something odd happened the day after Lula won: Brazilian stocks opened lower, then rebounded as buyers stepped in, and the index closed up 1.31%. During that race, investors had also been betting that a close contest would push the winner toward the center. They were betting on pressure, not only on a person.
This year the bet looks more one-sided. When a price already assumes an outcome at 83%, being right earns little and being wrong costs a lot. Lula turns 81 two days after the runoff, and he has come back from worse odds before. Three weeks is a long time in Brazilian politics.
My take: Brazil’s market voted on Monday. It voted in 2022, too.
Not advice. Just how I see it.