Brazilian stocks plunge after Lula's surprising election victory

Brazilian stocks plunged in early trading Monday after the country's surprising runoff election results reversed a rally earlier this month in Brazilian assets.

The president of Latin America's largest economy, Luiz Inácio Lula da Silva, secured a surprising win over right-wing challenger Flávio Bolsonaro in a Sunday runoff election after Bolsonaro took an unexpected first-round lead in the general election earlier this month.

The iShares MSCI Brazil ETF ( EWZ ), which tracks Brazilian stocks, dropped 24% early Monday, a move that, if sustained through the closing bell, could mark the index's biggest single-day decline since it began trading in July 2000, according to Yahoo Finance data. The ETF's previous record was a 23% decline at the beginning of the pandemic in March 2020.

The stocks of majority state-owned Brazilian energy giant Petrobras ( PBR ) and Nu Holdings ( NU ), the parent company of Brazilian digital bank Nubank, fell 15% and 20%, respectively.

Earlier this month, Brazilian stocks surged following Bolsonaro's better-than-expected showing in the country's Oct. 4 general election.

Investors viewed Bolsonaro, the son of former President Jair Bolsonaro, as a candidate poised to shift the country toward more business-friendly and fiscally constrained policies.

The election outcome comes after polls showed Bolsonaro holding a narrow lead over President Lula, while wagers on the prediction market Kalshi suggested the right-wing candidate was heavily favored to win.

Lula's reelection instead renews questions about the country's fiscal outlook and the pace of future interest rate cuts.

Until Lula's government establishes a more credible fiscal framework, Brazil faces "a period of higher rates, elevated sensitivity to policy announcements, and a rate cutting cycle more likely than not to stall," Benjamin Mandel, an economist at Jubarte Capital, warned ahead of the election outcome.

Because investors have seen the election outcome as having direct bearing on Brazil's fiscal discipline, Mandel described any reaction to the election as "likely to be binary and highly persistent," in a Friday note.

Follow David Hollerith on X @DsHollers .