Lula Wins Brazil's Runoff in a Comeback, and Brazilian Stocks Plunge Overnight

President Luiz Inácio Lula da Silva won Brazil's presidential election on Sunday, the country's electoral authority said, defeating right-wing Senator Flávio Bolsonaro in a runoff to secure a fourth non-consecutive term — a comeback from second place in the first round that no Brazilian candidate had managed since elections were restored in 1989.

The count made the upset concrete. Lula took 51.76% of the vote to Bolsonaro's 48.24%, according to figures reported by the Financial Times, a margin of about 4.4 million votes that reversed Bolsonaro's 2.2 million-vote lead from the first round on Oct. 4. Final polls had called the race a statistical dead heat, and prediction markets had given Lula only about a 20% chance of victory, TheStreet reported — positioning that helps explain what happened next in the markets.

The overnight verdict was a rout, in thin markets

The iShares MSCI Brazil ETF, the largest US-listed fund tracking Brazilian stocks, crashed 18% on Sunday night on Robinhood, Investor's Business Daily reported, and a separate overnight tally in New York put the fund down 18.90% at 9:40 p.m. Brasília time. Petrobras skidded 14% in the Robinhood snapshot, while the second tally had its American depositary receipts down 11.01%; Itaú's ADRs slid 13.65%, Bradesco dropped 12.29% and Vale lost 4.44% in that tally, and MercadoLibre, whose biggest market is Brazil, slumped 6% in the Robinhood snapshot. In Asia, a Tokyo-listed fund tracking the Bovespa index fell nearly 15%. Every one of those numbers comes from overnight or offshore trading, which is thin by nature — they are the market's opening bid on the result, not a settled close, and Monday's session in São Paulo will test them.

A trade built for the other result is unwinding

Brazilian assets had rallied hard on the opposite outcome. After Bolsonaro finished ahead in the first round, the Brazil fund soared 12.5% on Oct. 5 to its highest levels since February 2020, and the Ibovespa rose nearly 8% that Monday, as investors priced in the more stringent fiscal policy and lower corporate taxes Bolsonaro had promised. Sunday's result reverses that assumption trade by trade. Goldman Sachs has set out an extreme scenario for Monday — the dollar up as much as 10% against the real, long-term government bond yields climbing about 200 basis points, credit spreads widening 30 to 40 basis points and equities falling about 15% — while stressing that this is an extreme case, not its central expectation.

The loser is not conceding

Bolsonaro said on Sunday he would not concede defeat and would seek the annulment of the runoff election, calling a ruling by Supreme Court Justice Cristiano Zanin that extended voting for two hours “unacceptable.” His team has also asked courts to annul the runoff over voting issues. The electoral authority has nonetheless declared Lula the winner; whether the annulment effort gains any traction in the courts is unknown, and it is the first live uncertainty of the new term.

The fourth term starts with the debt question

The economic inheritance explains why markets cared so much about the identity of the winner. Brazil's public debt has surged more than 10 percentage points during Lula's current term to over 82% of gross domestic product, mandatory spending leaves under 8% of the federal budget adjustable, and interest rates stand at 13.75% with annual inflation of 4.6%, above the central bank's tolerance range. A record nearly 84 million Brazilians and 9.3 million businesses are behind on debt payments, according to the credit bureau Serasa. Lula has promised a fiscal adjustment that spares his social programs, without yet saying how the two fit together, and he will have to do it in front of the most conservative Congress since Brazil's return to democracy in the 1980s — Bolsonaro's Liberal Party and its allies are set to control both chambers. His fourth term begins in January, when a new value-added tax is also set to take effect, and the government still has not disclosed its effective rate, which independent analysts estimate at around 28%.

Monday's open is the real test

What happens next is a market question before it is a political one: whether the real, local interest-rate futures and the Bovespa confirm the scale of the overnight selling when São Paulo opens on Monday, or whether dip-buyers treat an 18% overnight drop in thin trading as an overreaction. Early signals from Lula's camp on fiscal policy for the new term will matter as much as the opening prints, and so will the first rulings on the annulment effort. The result itself is settled — the electoral authority has spoken — but the price of the result is not.