Markets
Brazil Votes in a Runoff After Pricing a Bolsonaro Lead: the Ibovespa Is Up 6.8% and the Real 4.5% Since the First Round
Brazil holds its presidential runoff on Sunday between Flávio Bolsonaro and President Lula, with the final polls at 51% to 49%. Since the October 4 first round, which Bolsonaro won with 47.03%, the Ibovespa has risen 6.8% and the real 4.5%. Almost all of both moves came in a single session, on October 5. Polls close at 5 p.m. in Brasília, and the count usually takes a few hours.
Brazil's markets placed their bet three weeks ago and have spent the time since waiting for the vote that settles it. In the first round on October 4, Flávio Bolsonaro, the son of the former president, took 47.03% of valid votes against 45.16% for President Luiz Inácio Lula da Silva, according to the electoral court's final count, when the polls had expected Lula to finish first by about three points. Neither passed 50%, so the two meet in a runoff on Sunday, October 25. Polls are open from 8 a.m. to 5 p.m. Brasília time, 11:00 to 20:00 UTC, and the electoral court begins publishing results as soon as voting ends; in 2022 about 97% of the vote had been counted about four and a half hours later.
The market's reaction to the first round came in one day. On October 5 the Ibovespa rose 7.70% to 206,911.89, its first close above 200,000, and the real gained about 4%, with the central bank's PTAX reference rate at 4.9859 per dollar from about 5.22 the week before. Analysts quoted by France 24 and Reuters described it as a fall in the political risk premium rather than a change in anything fundamental: no policy had changed, but investors read a Bolsonaro presidency as more favourable to spending restraint, and long-dated interest rates fell with the currency. The iShares MSCI Brazil ETF, which trades in New York, rose 12.5% that day.
Since then the trade has held but not grown. The Ibovespa set a record close of 209,067 on October 9 and ended Friday, October 23, at 205,083, up 0.47% on the day, 6.75% above its close of 192,115 before the first round and 1.9% below the record. The dollar closed the week at about 4.996 reais, about 4.5% weaker than before the first round, after the real firmed on Friday to its strongest level in more than two weeks. A move that size in a currency is what investors normally ask of a change of government, not of a first-round result.
The polls make the bet uncomfortable. The final surveys put the race at 51% to 49% for Bolsonaro among valid votes in both Datafolha and Quaest, inside the margin of error, and an average of 45 runoff polls compiled by The Rio Times has Bolsonaro ahead in 39 of them by a similar margin. A market that has priced one outcome to a large degree tends to react asymmetrically: a Bolsonaro win confirms what is already in the price, while a Lula win would require the October 5 move, about 4% in the currency and 7% in stocks, to be reconsidered in a single Monday session.
That is the reason to watch the count on Sunday evening rather than the Monday open. Offshore proxies for the real, such as the dollar-stablecoin pair on crypto exchanges, trade through the weekend and will move first; the B3 exchange in São Paulo and the American depositary receipts of Petrobras, Itaú and Vale will follow on Monday morning, at the start of a week that also brings the Federal Reserve's decision on Wednesday.