On Friday evening, the dollar was worth 4.99 reais. In between, Lula secured a fourth term that the market had refused to see coming, and Brazil’s stock exchange had to pull the plug.
In brief
- The Ibovespa plunged on Monday, October 26.
- The dollar jumped as much as 12.25% against the real, reaching 5.6047 reais at its high, versus 4.9931 at Friday’s close.
- Contagion remains limited for now: MSCI emerging-market equity and currency indexes stayed stable on Monday. The next test is the Fed on Wednesday, October 28.
A vote the market had not priced in
Lula defeated Flávio Bolsonaro, according to the announced results. The former president’s son had nevertheless finished first in the first round on October 4. According to Money Times, a candidate who finishes second in the first round is overturning the result in the runoff.
Investors had bet heavily on a change in government. Even on Friday, Brazilian assets were rising in the afternoon, driven by the conviction that Flávio would win, reports InfoMoney. The right-wing candidate had promised tighter fiscal policy. The market had already priced it in.
On Monday, all of that had to be unwound. Rachel Ziemba, a researcher at the Center for a New American Security, explains the mechanics on Al Jazeera: traders are covering positions built around a Bolsonaro victory and fiscal discipline. Another source of tension is Flávio Bolsonaro’s refusal to concede defeat.
An extraordinary session in São Paulo
B3 triggered the circuit breaker within the first few minutes. Stocks, options and indexes were halted for 30 minutes. The last time this happened was in March 2020, at the height of the pandemic.
When trading resumed, the sell-off continued. Around 11 a.m. Brasília time, the Ibovespa was plunging, according to the Reuters report carried by UOL. Rate-sensitive stocks took the hardest hit: C&A collapsed 50%. At 3:10 p.m., the index was still down, according to Metrópoles.
The rates market followed. DI contracts, which reflect Brazilian rate expectations, initially climbed more than 300 basis points. The market now expects the Selic rate to rise as early as November.
The shock began outside Brazil, where trading was still possible. In New York, EWZ, the main Brazilian equity ETF, was falling before the open. B3 itself had changed the daily upper limit for dollar futures, for this session only.
One stock bucked the trend: Vale gained 4.26%. The mining company sells in dollars and pays a large share of its costs in reais. Every real lost boosts its margins.
Why contagion remains contained—for now
On Monday, the rest of the emerging world watched Brazil without following it lower. According to Finimize, MSCI emerging-market equity and currency indexes remained stable, helped by the decline in oil prices. Brazil’s dollar-denominated sovereign bond maturing in 2037 fell to 104.766.
That points to a shock focused mainly on Brazil. Investors are demanding a higher risk premium from a country whose fiscal trajectory worries them. For now, they are not fleeing the entire asset class. Three channels could nevertheless spread the shock.
The carry trade
The real is a classic carry-trade currency: high interest rates attract capital borrowed elsewhere at lower cost. When a carry position loses heavily in a single session, managers often cut other positions of the same type to reduce their overall risk. The Mexican peso and South African rand are the first candidates for this kind of forced selling. Watch them: they will tell you whether Brazil remains an isolated case.
The dollar and the Fed
The broader backdrop is relatively supportive for emerging markets. The dollar was weakening on Monday morning and the yuan reached a four-year high. But it is a busy week. The Fed announces its decision on Wednesday, October 28, at 7 p.m., with rates expected to remain unchanged. The Atlanta Fed’s tracker puts the probability of a December hike at nearly 87%. On Monday, the U.S. Treasury sold two-year notes at 4.708%. A more hawkish-than-expected Fed would hit already-fragile currencies first. The real is one of them.
Commodities
Brazil exports large volumes of iron ore, soybeans and oil. A weaker real makes its exports cheaper in dollar terms. Brazilian producers can therefore sell more aggressively. The effect rarely shows up in a single session, but it weighs on agricultural markets when currency weakness persists.
The market was not wrong about Brazil. It was wrong about its own certainty.
Three scenarios cited by the sources
| Scenario | What it assumes | What the sources say |
|---|---|---|
| Calm returns | The government reassures markets about debt | Analysts interviewed by Metrópoles expect tensions to ease. Wells Fargo had forecast a dollar at 5.30 reais in the event of re-election and believes carry could support the real. |
| Prolonged stress | No credible fiscal measures | InfoMoney notes that the market is waiting for credible measures to stabilize debt and expects the Selic rate to rise in November. |
| Contagion | Hawkish Fed, stronger dollar, carry-trade unwinding | Emerging markets remained stable on Monday, according to Finimize; the Fed’s October 28 decision will set the tone for global credit. |
Flávio Bolsonaro’s legal challenge adds another unknown. Even if the electoral court confirms the result, every twist can reignite volatility.
What retail traders should watch
First, liquidity. A circuit breaker traps you in your position. For 30 minutes, no stop can get you out. On exotic CFDs linked to the real or the Ibovespa, spreads widen and quotes gap. If you have no specific reason to be there, this is not the week to discover these markets.
Next, the asymmetry of percentages. Always calculate your risk in your account currency.
Finally, gap risk. The shock happened on a Sunday night, while the market was closed. A stop placed on Friday protected no one.
The calendar will not give you much breathing room. The Bank of Canada announces its decision on Wednesday, October 28, at 2:45 p.m. On Thursday, October 29, core PCE is released at 1:30 p.m.: check the measured impact of core PCE before taking a position. The ECB follows at 2:15 p.m.
Also note what this session reveals about your instincts. Thinking of selling the real after the fact? An AI trading journal such as Edgyx lets you tag these “political shock” trades and check over several months whether you actually make or lose money on this type of event.
Key takeaways
- Lula’s re-election sent the Ibovespa plunging and pushed the dollar as high as 5.6047 reais. The market had bet on the other side.
- Contagion remains contained: MSCI emerging-market indexes stayed stable on Monday. The Mexican peso and rand will serve as barometers.
- The Fed on October 28, the ECB and October 29’s PCE report will determine whether the shock remains Brazilian or spreads across emerging markets.
- A circuit breaker or weekend gap can make a stop ineffective. Size your positions for the worst plausible move, not the distance to your stop.
