Brazil Stocks Slump After Election Upset, Ibovespa Posts Biggest Drop Since 2020

what happened

According to Barron's, Brazil's Ibovespa dropped 14% on Monday, its steepest percentage decline since March 2020, while the iShares MSCI Brazil ETF (EWZ) fell 20%. The slide erased most of the index's gains for the year, including the rally that followed the first round, when results pointed to an advantage for Sen. Flávio Bolsonaro over incumbent Luiz Inácio Lula da Silva. Financial stocks were hit hardest, with XP shares sinking near 50% in their worst day on record.

In an interview, XP chief investment officer Artur Wichmann blamed the reaction on Brazil's fiscal position, citing high debt relative to GDP, a large deficit and a rigid, constitutionally fixed budget. He said Lula's approach to fiscal policy has been ambiguous, but that Brazil still offers opportunities if policy stays consistent.

why it matters

After the first round, investors had priced in a move toward fiscal discipline, and the second-round result reversed that hope, pushing risk premiums back into Brazilian assets. Wichmann also noted that real interest rates in Brazil are among the highest in the world, so room for the central bank to keep cutting depends on the fiscal path.

market impact

Ibovespa, EWZ, XP shares: fiscal risk premium returns, pressuring Brazilian assets

• ▼Ibovespa pressure down — risk premiums rose after the second-round result
• ▼EWZ pressure down — foreign-listed Brazil exposure fell with local stocks
• ▼XP shares pressure down — broad selloff in financial stocks on fiscal concerns

instruments