Why is Itau Unibanco Banco stock plunging today?

Itau Unibanco Banco Holding SA ADR stock plunged 26.6% in pre-open trading to trade at $7.10 after Brazilian President Luiz Inácio Lula da Silva secured a surprise comeback victory in Sunday’s presidential runoff, defeating right-wing senator Flávio Bolsonaro by approximately 51.8% to 48.2% of the vote — an outcome that directly reversed the market-friendly political narrative that had been driving Brazilian assets higher for weeks.

Investors had expected Bolsonaro to cut fiscal spending and curb government debt, creating conditions for interest rate cuts, while markets grew concerned that Lula may be reluctant to pursue the austerity measures seen as necessary to strengthen Brazil’s public finances.

Goldman Sachs analysts expect only "modest measures" to contain government spending growth under Lula, alongside further increases in an already high tax burden, while major structural reforms remain unlikely.

Adding to the uncertainty, the election result raised the prospect of prolonged political instability, as Bolsonaro called for the result to be annulled, alleging that the Supreme Court had changed the rules by ordering a last-minute extension of voting hours.

Markets had moved sharply in anticipation of a right-wing shift since Bolsonaro unexpectedly finished first in the opening round three weeks ago, with stocks closing on Friday almost 7% above their level going into the first round while the real currency was nearly 5% stronger against the U.S. dollar.

The iShares MSCI Brazil ETF plunged nearly 20% in overnight trading following the election results, while the Bovespa index ETF traded in Tokyo fell nearly 15% in Asian trading, signaling that investors had been positioned for a Bolsonaro victory.

Local brokerage Monte Bravo estimated that if President Lula won, the Ibovespa could fall 11% in the first hour of trading, as the index had risen about 7% between October 4 and October 23 on Bolsonaro optimism.

By contrast, the U.S. broad market was mildly positive, with the S&P 500 adding 0.3% and the Dow Jones gaining 0.5%, underscoring that ITUB’s collapse was driven entirely by Brazil-specific political and fiscal risk rather than any U.S. macro development.

The confluence of a shock election outcome, an unwinding of weeks of election-driven gains, fears over Brazil’s fiscal trajectory under Lula, political uncertainty stemming from Bolsonaro’s refusal to concede, and a collapsing Brazilian real combined to produce one of the sharpest single-session declines for the ADR in recent memory, pushing ITUB’s price back toward the lower end of its 52-week range near $6.82.