Why is Petrobras stock plunging today?

Petrobras stock plunged 21.7% in pre-open trading to reach $20.49 after President Luiz Inácio Lula da Silva secured an unprecedented fourth term in Brazil’s presidential runoff on Sunday, defeating Senator Flávio Bolsonaro by a margin of roughly 51.8% to 48.2% in a result that caught financial markets almost entirely off guard.

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

The severity of the move reflects how aggressively markets had repositioned in favor of a Bolsonaro victory following his first-round lead earlier this month.

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 and the real currency nearly 5% stronger against the U.S. dollar, while interest-rate futures had priced in expectations that tighter public finances would allow borrowing costs to decline.

For investors who had been banking on Bolsonaro to fix Brazil’s fiscal accounts, Lula’s win is a blow, as traders had been piling into the country’s markets on the hope he would be more committed to spending cuts than Lula, who has focused more on boosting growth through consumption than addressing Brazil’s fiscal situation.

The rout extended well beyond Petrobras. Petrobras plunged roughly 22% in premarket trading, while banking stocks were also hit hard, with Itaú Unibanco, Banco Bradesco, and Nu down between 23% and 29%, and e-commerce company MercadoLibre dropping sharply as well.

The iShares MSCI Brazil ETF plunged nearly 20% in overnight trading following Lula’s win, as markets braced for the upset after Bolsonaro’s first-round win had sent stocks higher.

Meanwhile, the broader U.S. market was modestly higher, with the S&P 500 gaining 0.3% and the Dow Jones adding 0.5%, underscoring that the Petrobras decline was entirely a Brazil-specific political shock.

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, and 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.

Adding to the uncertainty, Senator Flávio Bolsonaro has refused to concede, leaving the political backdrop unsettled as Petrobras heads toward its production and sales report due October 28 and full Q3 earnings on November 10.