Brazil Stocks Rocket Higher After Election: Bolsonaro’s Runoff Chances Jump to More Than 80%

Brazilian stocks surged as investors dramatically increased their bets that right-wing presidential candidate Flávio Bolsonaro will defeat President Luiz Inácio Lula da Silva in Brazil's October 25 runoff election, after Bolsonaro delivered a much stronger-than-expected performance in the first round.

Bolsonaro, the son of former President Jair Bolsonaro, finished Sunday's vote with about 47% of valid ballots, compared with roughly 45% for Lula. Neither candidate cleared the 50% threshold required to win outright, sending Latin America's largest economy into a runoff in just under three weeks.

The result immediately changed expectations surrounding the race. Prediction markets had already viewed Bolsonaro as competitive, but his first-place finish pushed his perceived chances of winning sharply higher.

Financial markets reacted even more dramatically. Brazil's benchmark Bovespa index jumped more than 8% on Monday, climbing above 205,000 points, while the Brazilian real strengthened more than 4% against the U.S. dollar.

Shares of several Brazilian companies posted double-digit gains, including retailer Magazine Luiza, exchange operator B3 and investment bank BTG Pactual, which each climbed more than 20% at points during the session.

Brazilian stocks trading in the United States also rallied. The iShares MSCI Brazil ETF jumped more than 12%, while U.S.-listed shares of Itaú Unibanco gained about 15% and Banco Bradesco surged roughly 19%.

The enthusiasm reflects investors' expectations that a Bolsonaro administration would pursue tighter fiscal policies, lower government spending and a more business-friendly economic agenda. Flávio Bolsonaro has campaigned on promises to curb Brazil's debt, reduce spending and cut taxes in an effort to stimulate economic growth.

Those promises have become particularly important as concerns grow over Brazil's public finances. The country's fiscal position has deteriorated under Lula, with public debt rising to nearly 83% of gross domestic product. The budget deficit has also approached levels last seen during the COVID-19 pandemic.

J.P. Morgan upgraded Brazilian equities to "overweight" following Sunday's election results, citing the changing political outlook. Bolsonaro's Liberal Party and its allies also made significant gains in Congress, potentially giving a future Bolsonaro administration greater room to advance fiscal and economic reforms.

Still, the market rally is partly a bet on what Bolsonaro might do rather than what he can necessarily deliver. Brazil's budget contains substantial mandatory spending on pensions, benefits and public-sector salaries, limiting any president's ability to quickly slash expenditures. Analysts have warned that Bolsonaro's proposed fiscal adjustment may fall well short of what would be required to stabilize the country's debt burden.

For Lula, the first-round result was a significant setback. Pre-election polling had generally shown the 80-year-old president leading Bolsonaro in the opening round. Instead, Bolsonaro finished nearly two percentage points ahead, giving the challenger momentum heading into the final weeks.

Lula, who returned to the presidency in 2023 after defeating Jair Bolsonaro in the 2022 election, is now seeking an unprecedented fourth nonconsecutive term. His campaign has sought to connect Flávio Bolsonaro to his father's political legacy while portraying the younger Bolsonaro as too risky to lead the country.

The president may also be preparing an economic counteroffensive. Reuters reported that Lula is considering naming Vice President Geraldo Alckmin, a centrist with strong ties to Brazil's business community, as finance minister if he wins reelection, a move that could be designed to reassure investors and attract moderate voters ahead of the runoff.