Brazilian Markets Brace for Rally as Flavio Bolsonaro Takes Surprise Lead Over Lula

POLICY WIRE — Sao Paulo/Brasilia, Brazil — Financial markets in Brazil are expected to surge on Monday following a stronger-than-anticipated performance by right-wing Senator Flavio Bolsonaro in the first round of the presidential election. Bolsonaro secured 47% of the vote, surpassing private polling projections and moving ahead of incumbent President Luiz Inacio Lula da Silva, who garnered approximately 45%.

The two candidates emerged as the primary contenders among a field of 12, navigating a campaign cycle heavily focused on crime, corruption, and the rising cost of living. With neither candidate securing an outright victory, the pair will now face off in a runoff election later this month.

While domestic markets remained closed, international trading indicators signaled a positive opening. The Frankfurt-listed MSCI Brazil ETF saw a jump of over 14%, while Brazilian firms such as Petrobras and Itau Unibanco experienced gains in overseas trading. Thierry Larose, a portfolio manager at Vontobel, noted that a strong rally across Brazilian assets is expected.

Flavio Bolsonaro has positioned himself as a more moderate alternative to his father, the former president currently serving a 27-year sentence for plotting a coup. His platform emphasizes a pro-market agenda, including tax reductions, privatization, and stricter public spending controls. Larose suggested that while it remains to be seen if the senator will be more fiscally responsible than a potential fourth term for Lula, investors are likely to grant him the benefit of the doubt.

Currency analysts anticipate the real, currently trading near 5.22 per dollar, will strengthen. Societe Generale projects the currency could firm to 5.10 by the end of 2026, with potential to drop below 5.00 in early 2027. Pedro Galdi of AGF Investments stated that the market is seeking reform and a reduction in the public deficit, noting that the current government has failed to address these concerns.

Market experts draw parallels to the 2022 election, when the Bovespa index rose 5.5% and the currency strengthened by more than 4% following a better-than-expected first-round result for the elder Bolsonaro. Ivo Chermont, chief economist at Quantitas, predicted a powerful rally, estimating that the dollar could fall between 2% and 4% while equities might rise by 4% to 6%.

Bryan Harris, managing partner at Sabio, added that the senator’s performance will likely bolster market confidence in the near term, provided he offers clear signals regarding his commitment to resolving national issues. Meanwhile, the political climate remains tense, with reports of alleged foreign interference and concerns from Lula’s allies regarding the recognition of election results.

Reporting by Policy-Wire (PW)