Brazilian presidential candidate and incumbent President Luiz Inácio Lula da Silva celebrates after the results of the general election in Sao Paulo, Brazil, on October 25, 2026.
Rodrigo Paiva | Getty Images News | Getty Images
Luiz Inacio Lula da Silva’s sudden reelection as Brazil’s president on Sunday sparked a fierce market reaction and showed the tightrope he must walk between pleasing his grassroots supporters and nervous investors who could fuel a financial crisis.
The country’s benchmark stock index fell 13.9% on Monday, the sharpest one-day decline since the start of the coronavirus pandemic. brazilian real The currency fell nearly 8% against the US dollar, the most since 1999.
Brazil’s 10-year government bond yield rose 2.46 percentage points, the highest level in more than a decade.
The move wiped out gains in Brazilian assets after Flavio Bolsonaro, seen as the more market-friendly and fiscally disciplined of the candidates, won the first round of voting in early October.
Lula, who will take office from January 1, 2023 and previously served as president from 2003 to 2011, currently faces a number of challenges, including hostility from the far-right Congress and the White House, which oppose many of his policies.
Low growth, high inflation and interest rates
Lula promised big-ticket measures that would appeal to his grassroots supporters. These include protecting existing benefits, increasing the minimum wage in advance of inflation, expanding housing and education assistance programs, reducing taxes on food essentials, and reducing the country’s long working hours to 40 hours a week without pay cuts.
Rafael Chi, senior analyst for Latin America and emerging markets at Sygnum Global Advisors, said in a note Tuesday that his ability to execute “revolves around a central tension.”
Voters want “tangible improvements in household finances” and the election results will be seen as support for increased social spending, Ch said.
But bond markets are already worried about Brazil’s rising debt-to-GDP ratio and are likely to demand even higher premiums if public spending increases significantly. Brazil’s finance ministry on Monday canceled two bond auctions scheduled for this week over concerns about soaring demand and yields.
“If there is insufficient funding for fiscal expansion, the central bank’s (rate) cuts may be reduced and some of the relief expected by Lula may be offset,” he said.
“We believe Lula will address this tension in an orderly manner, first by reassuring markets and reaping the benefits of monetary easing, then seeking greater fiscal flexibility to deliver on conventional policy,” he added.
Ch added that reassurance could come from signals that the country is preparing measures to increase its primary budget surplus in 2027, including possible constitutional reforms to include an expanded spending freeze and the appointment of a market-minded finance minister.
The key question is whether markets see fiscal discipline as temporary, and whether Lula will embark on increased spending ahead of the 2030 elections if left-wing support wanes, Ch said. “If some of the economic benefits of even a limited easing cycle materialize, commitment to containment may weaken,” he said.
Elizabeth Johnson, managing director of Brazil research at TS Lombard, said on Tuesday that Lula faces a potential financial crisis “largely of his own making.”
Mr Johnson also said market-calming measures should be expected, including curbs on civil servant benefits, cuts to subsidy credits and proposals for new “sin taxes” on goods such as alcohol and tobacco in the coming days.
Meanwhile, Mr Johnson said the president would move quickly to approve reforms before the new parliament convenes in February, but that “this will depend on Lula’s desire to cut spending”.
“Our basic scenario is that Lula will proceed with modest fiscal reforms that will help us avoid a major fiscal crisis in 2027,” Johnson said.
Still, Brazilian stocks will suffer in the short term, according to Russ Mold, investment director at AJ Bell.
“While it remains to be seen who will pay for Lula’s proposed welfare spending and debt suspension for small businesses, it is likely that 10-year bond yields will rise first and then be questioned, a development that will only make Brazilian stocks relatively less attractive,” Moldo said in a note on Tuesday.
He said Brazil’s Ibo Vespa was the best performer among major stock indexes this year, helped by President Bolsonaro’s expected victory and the country benefiting from higher commodity prices.
“This decline may not provide broad support for the pan-Latin American index, which investors can easily access through exchange-traded funds (ETFs). The MSCI Latin America index hit a 12-year high this year, helped by a political shift to the right that was expected to include Brazil,” Mold said.
