The Zhitong Finance App learned that Brazilian President Luiz Inácio Lula da Silva won re-election on Sunday, defeating right-wing Senator Flavio Bosonaro. This result put the financial markets to the test: investors had previously bet that Brazil would experience a change of government, and with Lula's victory, these positions are expected to be concentrated in the midst of intense fluctuations in the coming week.
Brazilian real futures fell 10% during the Asian trading session in November, while the Tokyo-listed Brazilian Stock Exchange Traded Fund (ETF) Nomura NF Ibovespa Link ETF plummeted 15%.
Since Bosonaro unexpectedly ranked first in the first round of voting three weeks ago, the market has fluctuated greatly in anticipation of the Brazilian government turning to the right. Brazil's benchmark stock index, Ibovespa, closed nearly 7% higher than the level before the first round of voting on Friday, and the real appreciated by nearly 5% against the US dollar. Interest rate futures previously showed that the market expects tighter public finance to drive down borrowing costs.
Luis Felipe Vital, head of macro strategy at Warren Investimentos, said: “We expect a sharp market reaction on Monday, and aggressive repricing, asset sell-offs, and interest rate futures may hit the upper limit soon after opening.
Over the next four years, Lula must slow the growth of Brazil's debt while protecting social projects and investments. For investors, the question is whether his gradual restoration of public finances can reduce borrowing costs. If the market doesn't believe he can pay, lenders may demand higher interest rates, thereby increasing the burden of government debt and increasing credit costs for businesses and households.
Alejo Chervonco, chief investment officer for UBS Global Wealth Management Emerging Markets, said: “Investors want to see a clear and credible commitment to fiscal discipline. We expect most of the gains after the first round of voting will be erased, and market sentiment will remain weak until a clear fiscal plan is put in place.”
Chervonko said that investors expect the spending expansion associated with the election campaign to stop and hope to see a credible path to stabilizing public debt. “This also means establishing an effective working relationship with the opposition-leaning National Assembly, because no fiscal plan can be passed without congressional support.”
Lula's team aims to achieve an initial fiscal surplus of about 1.3% of GDP (that is, the surplus before interest payments are deducted) by 2030. This will leave funds to cover part of interest expenses and reduce the need for additional borrowing. But public debt already exceeds 82% of GDP, and pensions and other statutory expenses limit the scope for spending cuts.
“Lula's policy talks about cutting expenses, but he hasn't detailed how it will be implemented,” said Divia Singaravelu, head of research at Meridian 1305 Capital. She noted that the choice of the next finance minister would be an early signal to the market, adding: “We want to see information on the 2027 budget and spending cap.” Whoever holds the position will need to explain how campaign promises match these financial restrictions.
Gustavo Song, chief economist at Suno Research, said, “The key point is that even if pessimism prevails in the short term, investors need to pay attention to how the government's economic agenda progresses in the medium term. What is most interesting now is how the government is preparing for 2027.”