November futures for the Brazilian real fell 10 percent in Asian hours and a Tokyo-listed Brazil stock fund plunged 15 percent, while the US-listed EWZ Brazil fund fell as much as 19.6 percent after hours, as investors unwound bets on a Flávio Bolsonaro win after Lula's re-election.
Brazilian assets fell sharply overnight after Luiz Inácio Lula da Silva won re-election on Sunday. November futures for the real fell 10 percent in Asian hours on Monday, while a Tokyo-listed Brazilian stock exchange-traded fund plunged 15 percent. The US-listed iShares MSCI Brazil fund fell as much as 19.6 percent in after-hours trading in New York, and Petrobras depositary receipts lost about 12 percent, with Itaú Unibanco's receipts down 13.65 percent and Vale's down more than 4 percent.
The sell-off unwinds a rally built on expectations of a change of government. Markets had moved sharply after Flávio Bolsonaro, son of convicted former president Jair Bolsonaro, unexpectedly finished first in the opening round three weeks ago. Stocks closed on Friday almost 7 percent above their level going into the first round, while the real was nearly 5 percent stronger against the US dollar, and interest-rate futures had priced in expectations that tighter public finances would allow borrowing costs to fall.
Lula won about 51.8 percent of valid votes against roughly 48.2 percent for Senator Flávio Bolsonaro, according to the electoral court's count. Over the next four years he must slow the growth of Brazil's debt while protecting social programmes and investment. Reuters reported that his team aims for a primary budget surplus of about 1.3 percent of gross domestic product by 2030, with public debt already above 82 percent of GDP.
The Asian-hours and futures moves come from Reuters reporting, while the after-hours fund and depositary receipt figures come from Brazilian outlets including InfoMoney, Poder360 and Seu Dinheiro. After-hours trading is thin, so those prices are not official closes, and they do not describe Monday's session in São Paulo: dollar futures open at 12:00 UTC and the Ibovespa at 13:00 UTC, after this file's slot. Luis Felipe Vital, head of macro strategy at Warren Investimentos, told Reuters he expects a sharp reaction on Monday with aggressive repricing, while Alejo Czerwonko, chief investment officer for emerging markets at UBS Global Wealth Management, said investors want a clear and credible commitment to fiscal discipline and that the first-round rally is likely to be largely priced out until a clear fiscal plan emerges.
The market's question now is fiscal credibility. Without confidence that Lula can deliver, lenders could demand higher interest rates, adding to government debt and making credit more expensive for businesses and households. The B3 open on Monday and the first fiscal signals from Lula's team will show how much of the overnight move survives contact with a full trading session.