Markets
Brazil's Ibovespa Fell 13.88%, Its Worst Day Since 2020
Brazil's Ibovespa closed 13.88% lower at 176,608 on Monday, its steepest fall since March 2020, after Lula's runoff win. A 10% drop at the open triggered B3's first circuit breaker in more than six years, the dollar rose 8.79% to 5.4154 reais and Bradesco's preferred shares lost 21.7%.
The overnight moves were not an overshoot. When B3 opened in São Paulo on Monday, the Ibovespa fell 10% almost at once and trading stopped for 30 minutes, the first circuit breaker since the pandemic crash of March 2020, The Rio Times and Al Jazeera reported. When it resumed, the selling continued to an intraday low of 169,516, about 17.3% below Friday's close of about 205,000. The index ended at 176,608, down 13.88%. That is about 8% below where it stood before the first round on October 4, so the market did not just unwind the Bolsonaro rally; it went well past it.
Banks took the worst of it. Bradesco's preferred shares fell 21.70% to R$15.95, Itaú Unibanco's 13.66% to R$41.70 and the holding company Itaúsa 12.54%, according to The Rio Times. State-controlled Petrobras lost 8.18% on its preferred shares and 6.81% on its common, and Ambev fell 7.85%. Vale was the exception, up 4.01% to R$64.38, because its revenue is in dollars and a weaker real raises its local-currency earnings. Bloomberg reported that some smaller stocks lost more than half their value, that the small-cap benchmark fell 30%, the most on record, and that a New York-listed ETF tracking Brazilian stocks fell as much as 26%, its biggest drop since its debut in 2000. B3 widened its trading limits for the session.
The currency and rates moved just as hard. The dollar closed at 5.4154 reais, up 8.79%, the largest one-day move since at least 2020, after the real had been as much as 12% weaker in spot trading, Al Jazeera reported. Interest-rate futures rose 3.1%, and Bloomberg said swap rates on some contracts climbed more than three percentage points. Goldman Sachs' extreme scenario for a Lula win had been a 10% rise in the dollar, about 200 basis points on long-term yields and a 15% fall in stocks; Monday came close on the currency and stocks and went further on rates. JPMorgan downgraded Brazil's currency and rates to market weight, and Bradesco BBI cut its outlook for stocks to neutral.
Positioning explains much of the violence. "Traders are covering their bets that assume a Bolsonaro victory," Rachel Ziemba of the Center for a New American Security told Al Jazeera. Fiscal worries explain the rest: public debt is above 80% of GDP, the budget gap exceeds 9% of the economy according to Bloomberg, and Lula's team targets a budget surplus of about 1.3% of GDP only by 2030. "Lula's policies have talked about spending cuts, but he has not gone into the details of how that is going to look," said Divya Singaravelu of Meridian 1305 Capital. Flávio Bolsonaro has called for the result to be annulled, which adds a political risk premium on top of the fiscal one.
Some investors already see value. Wells Fargo's Alvaro Vivanco recommended buying the real near 5.56 per dollar, around Monday's weakest level, and expects it to strengthen toward 5.30, Bloomberg reported. The next piece of information the market wants is the name of Lula's finance minister, which will say more about the spending outlook than any campaign promise. With the Selic at 14.00%, the central bank has little room to cushion the currency with higher rates without hurting an economy that already pays double-digit borrowing costs, and prediction markets on Polymarket still gave a 51.5% chance of no change in December.