Brazil Markets Crash After Lula Reelection, Circuit Breaker Halts Sao Paulo Trading

Updated 22:02 UTC

Closing figures replaced the sharper intraday falls after Sao Paulo and New York shut. The Ibovespa closed down about 14 percent, its worst one day fall since the start of the Covid-19 pandemic, Reuters and the Wall Street Journal reported. The real closed down about 8 percent against the dollar, with Reuters putting the fall at 8.5 percent and calling it the biggest since the 1999 devaluation. The iShares MSCI Brazil ETF fell 20 percent in New York. Brazil bought back bonds and cancelled scheduled Treasury auctions as officials moved to calm the market, Reuters reported. The closing figures in this update supersede the intraday figures in the original report below, which recorded a 17 percent intraday fall and a drop of more than 12 percent in the real at the worst point of the morning.

Brazil's stock market crashed on Monday after Luiz Inacio Lula da Silva won reelection, overturning investor bets on a right wing victory. The Ibovespa, the main stock index, dropped 17 percent to a two month low of 169,516 points, after a circuit breaker halt at a 10 percent decline, Dow Jones Newswires reported. The dollar jumped more than 12 percent to a 10 month high of 5.6055 real shortly after the market opened, LSEG data showed.

All figures here are intraday Monday figures, not closing figures, and they differ slightly by source and market.

The halt in Sao Paulo

B3, the exchange operator, triggered a Stage 1 circuit breaker at 9:57 in the morning local time, halting all cash equity trading for 30 minutes after the Ibovespa plunged 10.0 percent. It was the 24th circuit breaker in the exchange's history, according to the B3 circuit breaker report carried by El Fondo. Ibovespa futures had declined 17.0 percent, and spot and futures dollar contracts surged 12.52 percent to 5.60 real.

A result the market did not price in

Lula beat Flavio Bolsonaro by 51.8 percent to 48.2 percent in Sunday's runoff, electoral authorities said, the Wall Street Journal reported. Markets had rallied earlier this month on expectations of a shift to the right after Bolsonaro finished first in the opening round. Prediction markets had pointed to a Bolsonaro win, with Kalshi pricing in a more than 75 percent chance of that outcome on Friday, Reuters reported.

"Everyone is very surprised today. There was a strong consensus that it was going the way of Bolsonaro which was seen as positive for local assets," Chris Turner, head of markets research at ING, told the Wall Street Journal.

The damage across assets

As Brazil opened, the real weakened around 12 percent against the US dollar and interest rate futures rose sharply, Reuters reported. The selloff extended to Brazil's international bonds, with the 2056 maturity down nearly 3 cents. The yield on a US dollar denominated government bond maturing in 2030 rose to 7.032 percent from 6.796 percent on Friday, according to Tradeweb data cited by the Wall Street Journal.

The iShares MSCI Brazil ETF fell 25 percent in early trade and was on track for its biggest one day fall on record, Dow Jones reported. State oil company Petrobras slid more than 10 percent in Sao Paulo, the Wall Street Journal reported. Seeking Alpha put Petrobras down 17.8 percent and Braskem down 38.8 percent in early trading, and Petrobras ADR shares fell 16.2 percent through 12:10 in the afternoon Eastern Time, The Motley Fool reported. Brazilian financial services company XP shed half its value, Nu Holdings fell 21 percent in New York and MercadoLibre fell 10 percent, the Wall Street Journal reported.

What investors watch next

Bolsonaro is refusing to concede, alleging the incumbent administration suppressed voting in key Bolsonaro leaning districts, while almost all other Latin American heads of state have congratulated Lula, with Argentine President Javier Milei holding back at that time, The Motley Fool reported. "Important for local financial markets will be how quickly Bolsonaro accepts the result, or at least allows the constitution to run its course," Chris Turner of ING told Reuters. "For investors, first and foremost would be who would lead the Ministry of Finance," Alberto Ramos and Panteleymon Semka of Goldman Sachs told the Wall Street Journal.