After the elections in Brazil: sharp drops on the stock exchange, the real plunges

Brazilian markets reacted with turmoil to President Luiz Inácio Lula da Silva's victory in the second round of elections. The real fell more than 8% against the dollar, Ibovespa futures dropped 15%, and B3 stock exchange expanded its daily fluctuation limit to 20%. The Treasury canceled bond auctions. According to El País, this is the sharpest drop of the real since 1999.

Brazilian markets reacted with turmoil to President Luiz Inácio Lula da Silva's victory in the second round of elections, a result that surprised investors. The real fell more than 8% against the dollar, to a rate of 5.42 reais. Ibovespa index futures dropped 15%, and trading was temporarily halted. In response, B3 stock exchange expanded its daily fluctuation limit to 20%, and the Treasury canceled bond auctions scheduled for October 27–29. According to El País, this is the sharpest drop of the real since 1999. The turmoil reflects the fact that investors had bet on a victory for Jair Bolsonaro, who was seen as likely to promote fiscal discipline. Now investors are focusing on the possibility that Bolsonaro will try to challenge the results, on Lula's ability to form a majority in a Congress controlled by the opposition, and especially on the composition of his economic team. Brazil's public debt exceeds 80% of GDP, and the yield on ten-year bonds stands at about 6.5%. Meanwhile, Brazilian stocks traded in the US fell in early trading: Petrobras dropped more than 20%, and Itaú Unibanco plunged nearly 30%. Alejandro Cuadrado from BBVA said the central bank may provide liquidity support if the real weakens beyond 5.40 reais to the dollar, and more significant intervention is expected when the rate crosses 5.60 reais to the dollar. According to him, "the response must be fiscal" and "from the markets' perspective, Lula will not enjoy a honeymoon period."