U.S.-listed Brazilian shares slump after shock Lula election win

U.S.-listed shares of Brazilian companies tumbled in premarket trading Monday, a day after President Luiz Inácio Lula da Silva pulled off a surprise win to secure a historic fourth term in office.

Senator Flavio Bolsonaro, son of former President Jair Bolsonaro and the first-round leader earlier this month, has refused to concede. Analysts and markets had largely positioned for a Bolsonaro victory, betting on economic reforms as Brazil contends with deteriorating public finances and elevated interest rates. 

Shares of oil giant Petrobras plunged roughly 22% in premarket trading by 05:10 ET (09:10 GMT). Banking stocks were also hit hard, with Itaú Unibanco, Banco Bradesco, and Nu down between 23% and 29%. E-commerce company MercadoLibre dropped 10.9%.

Ambev SA slumped around 18%, Banco Santander fell 4.5%, Vale lost 3.6%, and Embraer shed 3.8%. The broader iShares MSCI Brazil ETF tumbled over 27%.

Markets had shifted sharply in anticipation of a rightward turn in Brazilian politics since Bolsonaro unexpectedly won the first round three weeks ago. Brazil’s Bovespa index closed Friday nearly 7% above where it stood heading into that vote, while the real had strengthened almost 5% against the dollar. Interest-rate futures had pointed to expectations that tighter fiscal policy would eventually allow borrowing costs to fall.

Over the next four years, Lula faces the challenge of slowing the growth of Brazil’s debt load while preserving social programs and public investment. For investors, the central question is whether his more gradual approach to fiscal repair can still bring down borrowing costs.

Without confidence in his ability to deliver, lenders could demand higher rates on government debt, compounding Brazil’s fiscal burden and raising the cost of credit for businesses and households alike.

Lula’s economic team is targeting a primary budget surplus, before interest payments, of about 1.3% of GDP by 2030, a cushion that would help cover part of the country’s interest bill and reduce the need for fresh borrowing. But public debt already exceeds 82% of GDP, and mandatory spending on pensions and other legally protected programs leaves limited room for cuts.