Brazil assets slump after Lula re-election

Brazilian financial assets listed abroad fell sharply after President Luiz Inácio Lula da Silva defeated Flávio Bolsonaro in a runoff election. In Sunday evening trading, before Brazilian onshore markets reopen on Monday, pricing in currency and equity derivatives pointed to significant losses for both the real and Brazilian stocks.

Dollar futures traded on the CME jumped about 10% against the real on Sunday evening, implying that the Brazilian currency lost roughly a tenth of its value in offshore trading. In parallel, futures tied to the Brazilian real with November expiry, also traded on CME, showed a 9.12% drop, to 18.1450 U.S. cents per real, equivalent to approximately 5.51 reais per US dollar.

Separate prediction markets reflected the outcome of the presidential race, with contracts showing Lula at 99.9% versus 0.1% for Flávio Bolsonaro as of the evening of 25 October.

Brazilian equity exposure listed in foreign markets also pointed to sizable declines. A Tokyo-listed exchange-traded fund that tracks the Ibovespa, Brazil’s main stock index, fell more than 11% at the opening of Monday’s trading session in Japan. This move comes after the Ibovespa itself had closed Friday near 205,000 points, having risen 0.47% on the day and about 21.85% over the previous 12 months.

In New York, the main ETF of Brazilian stocks, the iShares MSCI Brazil ETF (EWZ), showed substantial stress in derivatives and cash trading. Perpetual contracts linked to EWZ registered losses, and near 21:20 Brasília time, EWZ shares were down 19.63% in US trading. The earlier advance of more than 11% in EWZ since the first round of the election contrasted with this abrupt reversal after Lula’s victory.

B3 listed the Ibovespa at 205,082.56 points in the previous session, with 7 of 15 tracked names advancing and 8 declining.

Ahead of the runoff, Brazilian assets had rallied as investors positioned for the election. From the first round to the runoff, the Ibovespa gained nearly 7%, the real appreciated more than 4% against the dollar, and EWZ advanced more than 11%, supported by expectations of political change.

A survey of 73 investors conducted by Citi found that 79.5% expected the Ibovespa to fall by more than 5% if Lula were re-elected, while 62.5% anticipated a depreciation of the real greater than 5% in the same scenario. The overnight declines in real and equity-linked instruments are consistent with these expectations and suggest that offshore markets are pricing in a weaker outlook for Brazilian risk assets following the election result.