Markets Bet on Bolsonaro: São Paulo Stock Exchange Jumps 8% as Right-Wing Surge Shocks Brazil
The Ibovespa hit a record high after Flávio Bolsonaro's stronger-than-expected first-round result. The real strengthened to 4.98 per dollar. Analysts see a 45% upside if he wins.
Brazil's financial markets woke up on Monday to a political reality that few had predicted and a rally that few had dared to imagine. After Flávio Bolsonaro's far stronger-than-expected showing in Sunday's first round of the presidential election, the Ibovespa — the main benchmark index of the São Paulo stock exchange, B3 — jumped 8%, opening at a new record high. On Friday it had already closed up 2.46%.
The rally is being driven by the unexpectedly wide lead secured by the son of former President Jair Bolsonaro, which investors interpret as a meaningful increase in the probability of a victory that would bring what they see as a more market-friendly fiscal and economic agenda. Bolsonaro's platform includes scrapping taxes, measures to rein in public debt, and the privatisation of dozens of state-owned companies.
Analysts at BTG Pactual, Latin America's largest investment bank, estimate that a Bolsonaro victory on October 25 could push B3's own shares up by as much as 45%.
The Brazilian real also strengthened sharply over the course of the day, trading at 4.98 reais to the dollar compared with 5.22 at Friday's close — a significant move for a currency that has been under pressure for much of the year.
The paradox of the moment is that the economic fundamentals under the incumbent, Luiz Inácio Lula da Silva, are not objectively poor. Inflation has been brought under control, and unemployment has fallen to a historic low during his third term. But voters are complaining about a loss of purchasing power, and in Brazil's current political climate, that sentiment has proven more powerful than the statistics.
Flávio Bolsonaro, of the far-right Liberal Party, won more than 56 million votes, or 47.03%, while Lula secured the backing of almost 53.9 million voters, or 45.16%. The margin of more than 2.2 million votes was the shock of the night, and the markets responded accordingly.
For now, investors are pricing in a Bolsonaro presidency before a single vote has been cast in the runoff. The optimism is real, but so is the volatility. Three weeks is a long time in politics, and the polls were wrong once already. If the second round delivers a different result, the same market that cheered on Monday could turn on a dime. For now, however, São Paulo is celebrating a bet it believes it is about to win.