Brazil’s financial markets suffered a major selloff on Monday, October 26, after President Luiz Inácio Lula da Silva defeated conservative Sen. Flávio Bolsonaro in Sunday’s presidential runoff. The result reversed a rally that had lifted Brazilian assets on expectations of a Bolsonaro victory and renewed efforts to rein in government spending.

The benchmark Ibovespa stock index plunged approximately 17% during Monday’s trading, falling to a two-month low near 169,500 points. The decline triggered a circuit breaker after the index fell 10% from its previous close, forcing Brazil’s exchange operator, B3, to suspend trading for 30 minutes. It was the first activation of the mechanism since the market turmoil of March 2020.

The Brazilian real also suffered a steep decline against the U.S. dollar. The dollar briefly rose more than 12% against the currency, reaching approximately 5.60 reais, as investors reacted to the election outcome. In New York, the iShares MSCI Brazil ETF, which tracks Brazilian equities, fell more than 25% in early trading.

The selloff extended into Brazil’s government debt markets. The National Treasury canceled scheduled auctions of inflation-linked and fixed-rate government bonds planned for Tuesday and Thursday, citing volatile market conditions. An auction of securities tied to Brazil’s benchmark interest rate remained scheduled. B3 also widened trading limits for certain futures contracts as market volatility intensified.

The market reaction followed Lula’s victory with 51.79% of valid votes, compared with 48.21% for Bolsonaro, according to Brazil’s Superior Electoral Court. Lula had finished behind Bolsonaro in the first round earlier in October but reversed the result in the runoff, securing a fourth, nonconsecutive presidential term. Bolsonaro’s campaign challenged aspects of the voting process, while electoral authorities declared Lula the winner.

Investors had increasingly positioned themselves for a Bolsonaro victory after his first-round lead, anticipating a more market-friendly approach to public finances. The prospect of tighter spending controls had helped lift Brazilian stocks and strengthen the real in the weeks leading up to the runoff.

Lula’s victory renewed concerns over Brazil’s fiscal outlook. Investors are watching whether his administration can contain public debt while maintaining social spending commitments, raising wages and supporting economic growth. Public debt has climbed during Lula’s current term, while mandatory government expenditures leave limited room for discretionary budget adjustments.

The government has targeted a primary budget surplus of approximately 1.3% of gross domestic product by 2030, but investors remain uncertain about whether the administration will implement sufficient spending restraint to reach its goals. Higher borrowing costs could further complicate those efforts by increasing the expense of servicing government debt.

Prediction markets and investor positioning also contributed to the abrupt reversal. Traders who had bet on a Bolsonaro win faced pressure to unwind those positions after Lula secured reelection. The market reaction illustrates the risk of pricing assets around an anticipated election outcome before the result is known.

The sharp declines do not, by themselves, establish the long-term direction of Brazil’s economy. Investors will now focus on the government’s fiscal plans, future economic appointments, and whether Lula can work with a conservative-leaning Congress to address public finances. In the immediate aftermath of the vote, however, the market reaction reflected a significant loss of confidence among investors who had expected a change in political leadership.