Lula reelection selloff hits Brazil funds and the real overnight

The Lula reelection selloff started before Brazil's own exchanges could open. Offshore funds tied to Brazilian stocks and currency futures fell hard on Sunday night after President Luiz Inácio Lula da Silva beat Senator Flávio Bolsonaro in the Oct. 25 runoff, reversing a rally built on bets that the right would take power.

What happened

With all 499,248 polling sections counted, Lula received 64,256,232 votes, or 51.79% of valid ballots, against 59,826,041 for Bolsonaro, according to electoral court figures published by G1. The gap of 4,392,907 votes nearly doubled the margin from the Oct. 4 first round, which Bolsonaro had won. Lula is the first candidate since 1989 to finish second in round one and still take the presidency.

Markets reacted quickly. The NEXT FUNDS Ibovespa Linked ETF in Tokyo was down 14.37% at 280 yen late on Sunday Brasília time, UOL reported, while Bloomberg Línea said the fund fell as much as 16%, its steepest intraday drop since 2020. The U.S.-listed EWZ fund traded 17.75% lower overnight at $35.03, and real futures on the CME implied about R$5.56 per dollar, a slide of almost 10% for the currency.

Bolsonaro refused to concede and asked for the result to be annulled, accusing the Supreme Court of changing the rules by extending voting hours late on Sunday, Bloomberg Línea reported. Few investors were prepared: in a Citigroup survey of 73 investors published on Friday, most expected a Lula win to knock at least 5% off the currency and push swap rates up by more than a percentage point.

Why it matters

Investors had crowded into Brazil after the first round. Banks including UBS, Morgan Stanley, JPMorgan and Citigroup turned bullish on hopes of a fiscal reset that would let interest rates fall. We described that trade in our look at the post-first-round rally, and last week traders were still adding runoff hedges as the polls tightened.

Goldman Sachs sketched an extreme scenario in which the real loses 10% to the dollar, long-term government bond yields rise by about 200 basis points, credit spreads widen by 30 to 40 basis points and stocks fall around 15%, investingLive reported. Goldman framed it as a tail case, not its forecast. Brokerage Monte Bravo had estimated that the Ibovespa could lose 11% in the first hour of trading if Lula won.

Gustavo Sung, chief economist at Suno Research, told UOL that a Lula victory was not his base case and that Monday could be very volatile as investors rework positions. Brazil's public debt is above 80% of GDP, Bloomberg Línea noted, which keeps fiscal policy at the center of the Lula reelection selloff.

What's next

B3 halts trading for 30 minutes if the Ibovespa drops 10%, and for another hour if losses reach 15% after the restart. The last time Brazilian stocks triggered a circuit breaker was early 2020. Spillover is already visible elsewhere: Chicago soybean futures slid to a two-month low on expectations of closer Brazil-China ties, investingLive said.

How far the Lula reelection selloff runs will depend on Lula's choice of economic team, his first signals on spending and any legal challenge to the count. The official tally is on G1's results page.