Brazilian markets suffered steep losses after President Luiz Inácio Lula da Silva pulled off a stunning comeback to defeat Flávio Bolsonaro, the right-wing candidate that many investors preferred.

Brazil’s real slumped 11% in early Monday trading, while some longer-dated swap-rates contracts surged almost 300 basis points, after hitting trading limits. The Ibovespa Index fell 10% at the market open, immediately triggering a circuit breaker — the first time the mechanism was put in place since early 2020, when the pandemic was roiling global markets. It’s also the benchmark’s sharpest drop since that period six years ago.

Exchange operator B3 widened trading limits for several key markets on Monday, allowing for larger-than-usual moves in the currency, interest rates and stock-index futures. The changes apply only to Monday’s regular trading session.

Stocks listed in the U.S. and Europe with Brazilian operations fell sharply. XP Inc. sank 52%, while Itau Unibanco Holding SA dropped 26% in pre-market trading in New York. Banco Santander SA and Telefonica SA fell more than 3%.

Brazilian dollar bonds sank across the curve, underperforming emerging-market peers, with some notes losing over 2.6 cents.

“The post-election message of the market is clear: There is no vacation time for the next four years, and the country will need to address the fiscal issue,” said Peter Varga, a senior portfolio manager at Erste Asset Management GmbH.

Lula, who markets see as unlikely to push for the fiscal austerity that Brazil needs in order to lower interest rates, won 51.8% of the runoff vote. Bolsonaro got 48.2%, according to Brazil’s electoral court.

Bolsonaro called for the annulment of the result, accusing the Supreme Court of changing the rules when it mandated a last-minute extension of voting hours.

Bullish calls

Investors had largely positioned for a Bolsonaro victory after his surprise lead in the first-round vote earlier this month triggered a major rally, drawing in billions of foreign flows on hopes of a much-demanded fiscal tightening that would allow for lower interest rates ahead. Firms including UBS Global Wealth Management, Morgan Stanley, JPMorgan Chase & Co., and Citigroup Inc. rushed to put out bullish calls for Brazilian assets.

As polls continued to point to a tight runoff as Lula rolled out a string of voter-friendly measures, many started ramping up hedges in order to protect their portfolios. But a Bolsonaro win was still largely seen as the base-case.

“Markets weren’t positioned for this,” said Anna Wu, an investment strategist and founder of Floodlines Research. “It’s more than a knee-jerk in my view as the local market now face real risk of government debt and currency weakness.”

After Lula’s victory, JPMorgan downgraded Brazil’s currency and rates to market-weight from overweight. Bradesco BBI lowered its outlook for the nation’s stocks to neutral.

Fiscal problems

Since returning to office in January 2023, Lula, an 80-year-old leftist, has sought to improve the lives of working Brazilians by boosting consumption and building on a credit expansion that took off during the pandemic. But he’s done little to address the country’s soaring deficits, which investors say are the reason the nation has some of the highest real rates in the world.

Brazil’s fiscal problems run deep, and the strain is showing across the economy. Household delinquencies are at a record, millions of companies are behind on payments and farmers are defaulting at an unprecedented pace. The government itself has little room to maneuver, with public debt above 80% of GDP and a budget that is largely tied up in mandatory spending.

Doubts about Lula’s commitment to reining in the fiscal deficit came to a head in late 2024. A selloff sent the real to a record low and engulfed everything from stocks to local-currency debt and dollar bonds.

Still, Brazilian markets have followed a rocky but ultimately positive path in his third term in office. High rates, while restrictive for the economy, make the currency appealing to carry traders amid a weaker dollar and a push away from US markets that has helped lift emerging markets more broadly.

“This result as a continuation of current policies — more fiscal spending, inflation running higher for longer and more public investment,” said Ales Koutny, head of international rates at Vanguard’s active funds. “Due to the current fiscal picture in Brazil, this leads to limited room for interest-rate cuts and a need for elevated higher real rates will remain.”

—With assistance from Vinícius Andrade, Abhishek Vishnoi, Ruth Carson, Marcus Wong and Ravil Shirodkar.

©2026 Bloomberg L.P. Visit bloomberg.com. Distributed by Tribune Content Agency, LLC.