Brazil stocks hit a record as Flávio Bolsonaro leads first-round vote

What’s going on here?

Brazil held the first round of its presidential election on Sunday, and the result surprised markets. Flávio Bolsonaro, son of former president Jair Bolsonaro, took 47.03% of the vote, about 56 million ballots, while President Luiz Inácio Lula da Silva won 45.16%. Polls had suggested Lula would lead the first round. Because nobody won a majority, the two face a runoff on October 25. On Monday, the São Paulo stock exchange's main index, the Ibovespa, rose around 8% to a record, and the real strengthened from 5.22 to roughly 4.98 against the US dollar.

What does this mean?

Investors see Bolsonaro as the more market-friendly candidate. His platform includes tax cuts, steps to control public debt and the sale of dozens of state-owned companies. That matters because Brazil's public finances are stretched: its budget deficit reached almost 10% of GDP in June, a level that tends to keep interest rates and borrowing costs high. A government seen as more disciplined could, in investors' eyes, eventually allow lower rates and a stronger currency.

The rally was broad and large. In New York, the iShares MSCI Brazil ETF climbed more than 12%, and US-listed shares of the big banks Itaú Unibanco and Bradesco rose about 15% and 19%. Banks are often the first to move on fiscal news because their profits and loan quality depend heavily on interest rates and economic confidence. Prediction markets shifted too: traders on Kalshi and Polymarket now put Bolsonaro's chances of winning at roughly 80% to 85%, up from about 60% before the vote.

Elections, however, are not decided by markets. Lula's campaign is trying to connect Flávio Bolsonaro to his father's challenge of the 2022 result, and three weeks is a long time in politics. Lula can also point to low unemployment and lower inflation during his term, even as many voters complain about weaker purchasing power.

Between now and October 25, investors will watch runoff polls, televised debates and any alliances with eliminated candidates, whose voters will decide the result. They will also look for detail on how a Bolsonaro government would cut the deficit in practice, since campaign promises of tax cuts and lower debt can pull in opposite directions. Analysts at BTG Pactual, Latin America's largest investment bank, have estimated that local shares could rise much further if he wins, though such forecasts depend heavily on the policies that follow.

The bull case

If Bolsonaro wins and delivers spending cuts and privatizations, investors could demand less of a risk premium on Brazilian assets. That could support further gains in stocks, a firmer real and lower borrowing costs, especially for rate-sensitive sectors like banks and consumer companies.

The bear case

Much of the good news is now priced in after one of the biggest daily rallies in years. A Lula comeback in the runoff, or a Bolsonaro government that struggles to pass reforms through Congress, could reverse the move sharply. Election-driven rallies in emerging markets are often volatile.