Brazil’s rally reflects expectations of change, but the fiscal test remains ahead

Brazilian assets rallied sharply after Flávio Bolsonaro outperformed Luiz Inácio Lula da Silva in the first round of the presidential election. The Ibovespa index rose 7.7% on the trading day after the vote, the real appreciated more than 4% against the dollar, and yields on 10-year government bonds declined. The scale of the moves reflects a shift in investor expectations, although the presidential race remains open.

A broad reaction across markets

The gains were not limited to the stock market. Government debt securities and Brazilian stocks traded abroad also advanced, while the local currency outperformed the dollar during the session. Taken together, these moves point to a reassessment of risk prospects and of the economic policy that could prevail after the runoff.

The gains varied across companies and sectors. Financial stocks and some companies linked to consumption and domestic activity posted notable increases. By contrast, some exporters lagged in Brazil during the session, in a context where the real’s appreciation may affect their results and how markets value them. A one-day reaction, on its own, cannot establish how these assets will perform.

What expectations the market is pricing in

The election result came as a surprise compared with polls that gave Lula an advantage, and strengthened bets on a possible Bolsonaro victory in the second round. Some of investors’ optimism is linked to the expectation of tighter fiscal policy, slower debt growth, and progress on reforms. If those expectations were translated into credible measures, they could reduce perceived risk and support bond and stock prices, as well as sustain the real.

But that scenario remains a hypothesis. According to Bloomberg Línea’s analysis, Bolsonaro has pledged to control spending, reduce bureaucracy, and cut taxes, although his fiscal plan has yet to be detailed. Anthony Kettle, senior portfolio manager for emerging markets at RBC BlueBay, said markets will probably give him the benefit of the doubt for now, but that the rally’s continuation will depend on whether he fulfills his fiscal commitments.

The economic context also imposes limits. The sources describe a high budget deficit, rising public debt, and interest rates in double digits. This combination keeps financing costs high and may constrain business and household activity. A possible improvement in expectations does not eliminate these challenges or guarantee a reduction in interest rates.

Congress and the runoff, decisive factors

The composition of Congress also affects the outlook. Gains by Bolsonaro-aligned candidates could make it easier to pass reforms if he wins the presidency; at the same time, a more conservative Congress could limit initiatives with a greater fiscal cost if Lula is reelected. For markets, therefore, it matters not only who wins, but also how capable the next government will be of turning its proposals into approved policies.

The second round scheduled for October 25 will be the next focal point. Until then, polls, campaign signals, and the possible redistribution of votes from eliminated candidates may shift expectations. Even after the election, asset performance will depend on concrete fiscal decisions, legislative support, and external factors, including international interest rates, capital flows, and commodity prices.

The rally reflects an early bet on Brazil’s direction, not confirmation that fiscal consolidation or reforms will follow. As Natalia Gurushina of VanEck warned, investors will move from watching campaign promises to demanding credible fiscal targets and verifiable progress. For companies, this difference between expectations and effective measures will be key to understanding whether recent valuations can hold.