Brazil's stock index tops 200,000 for the first time and the dollar breaks below R$5 after Flávio Bolsonaro's first-round lead

Brazil's main stock index broke through 200,000 points for the first time on Monday, and the dollar fell below R$5, as investors bet that Senator Flávio Bolsonaro's first-place finish in Sunday's presidential vote makes him the favorite in the Oct. 25 runoff.

The Ibovespa was up 8.55% at 208,535 at 2:16 p.m. in São Paulo (1:16 p.m. ET), after touching 209,606. It closed Friday at 192,115, and its previous closing record, about 198,000, was set on April 14. If the gain holds to the close, it would be the index's biggest one-day rise since March 24, 2020, when it jumped 9.69% during the pandemic rebound.

With all ballots counted, Bolsonaro, of the right-wing Liberal Party, took 47.03% of valid votes to 45.16% for President Luiz Inácio Lula da Silva, a margin of about 2.2 million votes. Most polls had shown Lula ahead. Neither reached 50%, so the two face each other again on Oct. 25. A first-round lead is not a win, and Monday's prices are a bet on the second round.

What moved

The currency moved almost as much as the stocks. Brazil's central bank set its reference dollar rate, known as PTAX, at R$4.9859 on Monday, down from R$5.2238 on Friday, a drop of about 4.6%. In spot trading the dollar was at R$4.9964 at 1:31 p.m. ET after falling as low as R$4.95, the first time it has traded below R$5 since May 18.

Interest-rate futures fell further. By mid-morning in São Paulo, the rate on the January 2035 interbank deposit contract, a market gauge of long-term borrowing costs, was down 126 basis points at 12.875%. A basis point is one-hundredth of a percentage point. The January 2028 contract was down 83 basis points at 12.68%, against a central bank benchmark Selic rate of 13.75%. Traders read that shorter-dated move as a bet on a rate cut at the bank's early-November decision, after the runoff.

Inside the index, the biggest gains came from companies tied to the domestic economy and to cheaper credit. Around midday local time, exchange operator B3, retailer Magazine Luiza, homebuilder Cyrela and investment bank BTG Pactual were each up between about 24% and 26%. State-controlled Banco do Brasil was up about 13%, and Petrobras' preferred shares were up nearly 10%.

In New York, U.S.-listed Brazilian shares followed. At 1:31 p.m. ET, brokerage XP was up about 33%, Itaú Unibanco about 17% and Petrobras about 13%. The iShares MSCI Brazil exchange-traded fund was up about 13%.

What did not

Exporters lagged. A stronger real means fewer reais for each dollar earned abroad. Around midday local time, pulp maker Suzano was down about 6%, planemaker Embraer about 4% and miner Vale about 3% in São Paulo. Vale's New York-listed shares were nonetheless up about 3% at 1:31 p.m. ET. The difference is mostly the currency: priced in dollars, a smaller loss in reais can turn into a gain.

Why investors care about the runoff

Investors broadly see a Bolsonaro government as more likely to tighten public spending, which they expect would cool inflation and make room for lower interest rates. They have viewed Lula's fiscal policy with distrust. Bolsonaro's party also did well in Congress: it won 19 of the 54 Senate seats contested on Sunday and will hold 28 of the 81 seats from 2027, the largest bloc.

J.P. Morgan raised Brazilian stocks to overweight from neutral after the vote, according to Valor Econômico, and said the MSCI Brazil index's valuation, measured against expected earnings, could rise by as much as 20%.

Not everyone is pricing in a done deal. "There is an important difference between expectation and delivery," Marco Saravalle, chief strategist at Krivo Capital, said in comments carried by a wire service, translated from Portuguese. "A right-wing Congress does not automatically mean a fiscally disciplined Congress."

Inflation is another complication. The central bank's weekly survey of economists, released Monday, showed the forecast for 2026 inflation back above 5% after a third straight weekly increase. That could limit how fast rates fall, whoever wins.