Trading on Brazil's stock exchange halted following Lula reelection

By Rodrigo Campos, Marcela Ayres and Karin Strohecker

NEW YORK/BRASILIA/LONDON, Oct 26 (Reuters) - Brazil's stock exchange halted trading via a circuit breaker safety mechanism on Monday in the wake of President Luiz Inacio Lula da Silva's reelection, undoing bullish investor sentiment after his right-wing rival led the first round of voting earlier in the month.

The real ‌weakened around 12% against the US dollar in spot trading as trading in Brazil got underway and Bovespa stock index futures tumbled nearly 15%, while interest rate ‌futures rose sharply. The selloff extended to Brazil's international bonds, with longer-dated debt hit hardest and the 2056 maturity down nearly 3 cents.

Trading on Brazil's stock exchange was halted for 30 minutes after the benchmark Ibovespa index fell 10% ​from its previous close, triggering the market's circuit breaker mechanism, stock exchange operator B3 said in a statement.

The move came after B3 had initially expanded the daily trading limits for Ibovespa stock index futures, dollar futures and interest rate futures in response to heightened market volatility.

As Brazilian markets haemorrhaged, the country's Treasury cancelled its regular auctions of inflation-linked and fixed-rate government bonds scheduled for October 27 and October 29, respectively.

The collapse is a sharp reversal from the rally seen earlier this month, when markets soared on expectations of a shift to the right after Flavio Bolsonaro, the son of former ‌President Jair Bolsonaro, unexpectedly finished first in the opening round ⁠of Brazil's presidential elections.

Stocks closed on Friday almost 7% above their level before the first round, while the real was nearly 5% stronger against the US dollar.

Interest rate futures had also reflected expectations that tighter fiscal policy under Flavio Bolsonaro would allow borrowing costs to decline.

Prediction markets had pointed ⁠to a Bolsonaro win, with Kalshi pricing in a more than 75% chance of that outcome on Friday.

"We expect a sharp market reaction on Monday, with aggressive repricing, a selloff in assets and interest rate futures likely to hit their upper limit shortly after the open," said Luis Felipe Vital, head of macro strategy at Warren Investimentos.

Bolsonaro's refusal to concede and his pledge to seek an annulment added to ​investor ​uncertainty.

"Important for local financial markets will be how quickly Bolsonaro accepts the result – or at least allows ​the constitution to run its course," said Chris Turner, strategist at ING ‌in London.