A Rally Built on a Probability

The first round of Brazil's presidential election caught markets off guard. Flávio Bolsonaro took the lead with 47.03% of valid votes, or 56.1 million ballots, ahead of Lula (45.16%, 53.9 million). The Ibovespa gained 12.2% the following week, rising from 186,340 to 209,067 points. The dollar moved from R$ 5.1743 to R$ 4.98, a drop of 3.8%.

The move did not reflect a change in fundamentals. It priced in a higher probability of a change in government, seen as favorable to economic policymaking. Investors rotated into rate-sensitive domestic equities and the real.

The Scenario Invalidated by the Ballot Box

Between the two rounds, Lula's campaign gained ground. A messaging group with more than 10 million participants served as a mobilization tool, and the candidate's supporters also took to the streets. The government, for its part, expanded social measures, including an increase in Bolsa Família and new incentives for microentrepreneurs. Lula won 64.2 million votes in the second round, 10.3 million more than in the first, against 59.8 million for his opponent. The 4.4 million-vote gap represents 3.58% of valid votes.

A Correction More Violent Than the Rally

Positions taken after the first round were unwound in bulk. The Ibovespa fell 18.12% over the week to close at 167,922 points, its worst week since March 20, 2020 (-18.88%). Listed companies shed roughly R$ 870 billion in market capitalization, from R$ 5.2 trillion to R$ 4.3 trillion. The dollar gained 9.04% to reach R$ 5.4442, its strongest weekly advance since October 2008.

For the month of October, the toll is heavy: -9.88% for the stock market, +5.22% for the dollar. The Ibovespa's level after the second round sits below its pre-first-round level. The correction thus erased the rally and then some, because prices had baked in an outcome that did not materialize.

The Limits of This Reading

This analysis rests on the chronology of prices and results. Nothing here documents foreign investor flows or the positions taken, which would allow a precise measurement of the selloff. Global sentiment gauges at the time, with a CNN Fear & Greed reading of 26.24 on November 1 and then 32.34 on November 2, point to a cautious mood. Nothing, however, justifies linking those levels to the Brazilian episode. Structural data (macroeconomic indicators, OECD leading indicators) could not be used for lack of a successful query.

Key Takeaways

The market did not punish the result itself, but the gap between the result and its own bet. The more a political scenario is priced in, the costlier it is to reverse. This episode does not allow one to predict how the correction will unfold.

This article was written with the assistance of artificial intelligence and verified by our editorial team.