Brazilian stocks and real fall after Lula’s election win as fiscal pressure mounts

Brazilian stocks and the real fell sharply on Monday, 26 October, after President Luiz Inácio Lula da Silva won Brazil’s election the previous day. The losses put immediate pressure on Lula to explain how he will fund promised social measures while addressing investors’ concerns about government debt.

CNBC reported that Brazil’s benchmark stock index closed down 13.9%, its steepest daily fall since the start of the COVID-19 pandemic. The real lost nearly 8% against the US dollar, its largest decline since 1999, while the yield on Brazil’s 10-year government bond rose 2.46 percentage points to a level last seen more than a decade ago.

Why Lula’s spending plans matter to bond investors

Lula has promised to protect existing benefits, raise the minimum wage faster than inflation, expand housing and education support, cut taxes on essential foods and shorten the working week to 40 hours without reducing pay, according to CNBC. Those pledges would affect household finances, while their cost raises questions for investors already concerned about Brazil’s rising debt burden.

Rafael Ch, a senior Latin America and emerging markets analyst at Signum Global Advisors, said voters want ‘tangible improvements in household finances’ and that the result would be seen as support for higher social spending, CNBC reported. CNBC said bond investors could demand higher returns if government spending rises substantially. It was not immediately clear which fiscal measures Lula would pursue or how Congress would respond.

Brazil’s National Treasury cancelled conventional auctions of inflation-linked and fixed-rate bonds scheduled for 27 and 29 October, according to a Treasury statement cited by Reuters and reported by The Guardian. CNBC also reported the cancellations amid concerns about demand and rising yields. The move meant the government would not hold those planned sales during a week of unusually sharp market moves.

The election result behind the market reaction

Lula won 51.79% of the vote in the 25 October runoff against Flávio Bolsonaro’s 48.21%, according to Superior Electoral Court figures reported by The Guardian. Deutsche Welle also reported the official result. Bolsonaro refused to concede, although Deutsche Welle reported that his party recognised Lula’s victory.

The election result establishes who will face the fiscal choices now drawing investors’ attention. The market losses show the scale of Monday’s reaction, but do not measure how much of each move was caused by the vote itself.