Brazil: Markets Celebrate the Election Result, but the Fiscal Shift Remains to Be Seen

Brazilian assets posted strong gains after Flávio Bolsonaro finished ahead of Luiz Inácio Lula da Silva in the first round of the presidential election. The result, more favorable to Bolsonaro than polls cited by the media had anticipated, changed investors’ expectations ahead of the October 25 runoff. However, the election has not yet been decided, and market movements do not amount to confirmation of future economic policies.

The reaction extended to stocks, the real and bonds

The Ibovespa rose 7.7% on the trading day following the vote, according to Bloomberg Línea, which also reported a record close. La Nación noted that the index rose by more than 9% in early trading and opened up nearly 8%. The differences reflect different points in the trading session. Among assets traded in New York, Bloomberg Línea reported a 12.54% gain for the iShares MSCI Brazil ETF (EWZ); Portafolio reported gains for Petrobras and Itaú of 6.68% and 15.48%, respectively.

The real also strengthened against the dollar: several media outlets recorded an appreciation of more than 4%, with the exchange rate near 5 reais per dollar. In fixed income, Portafolio reported that the yield on Brazilian 10-year bonds fell 1.3 percentage points to 12.99%. Since these were movements observed during a specific trading day, the figures describe the initial reaction and do not, by themselves, establish a lasting trend.

Fiscal expectations are behind some of the optimism

The analyses reported by the media link the market response to the possibility that a potential Bolsonaro government would pursue a stricter fiscal policy and market-friendly measures, such as privatizations or reforms. They also note that the advance of right-wing forces in Congress could influence a government’s ability to negotiate its agenda. These are expectations held by investors and the analysts cited, not approved decisions or guaranteed outcomes.

Salvatore Milanese, founding partner of Pantalica Partners, told BNamericas that some investors associate right-wing parties with a greater commitment to fiscal discipline. According to his analysis, if that expectation translated into lower medium- and long-term interest rates, it could benefit long-term investment projects and stock market activity. Meanwhile, Elisa Machado, partner and chief economist at KAT Investimentos, argued, according to Bloomberg Línea, that the central factor for markets is the likelihood of a change in the fiscal trajectory, rather than the candidate’s identity alone.

The election result does not resolve the limits on implementation

Whether the gains continue will depend, among other factors, on the outcome of the runoff and on fiscal promises being turned into a concrete and viable program. Diego Barnuevo, an Ebury analyst cited by Bloomberg Línea, warned that fiscal announcements were still vague and that disappointment on this front could reverse some of the real’s gains. Analyst Elisa Machado also noted that a closer contest in the second round could give back some of the improvement seen in asset prices.

BNamericas also reports concerns about the possibility of applying spending-cut policies used in other countries to Brazil: fiscal and economic conditions are not identical, and the scope for reducing the budget is constrained by mandatory expenditures. Bloomberg Línea, for its part, points to the level and trajectory of public debt as factors that will continue to weigh on investors’ assessments. In sum, the rally reflects a rapid reassessment of political and economic expectations; the actual direction of fiscal policy and its effects will depend on the election outcome, the political composition, and the measures that can ultimately be implemented.