Brazilian stocks crash after Lula's upset win: EWZ closes down 19.8%, B3 trips circuit breaker

Brazilian assets suffered one of their worst sessions in decades on Monday, Oct. 26, after President Luiz Inácio Lula da Silva won Sunday's runoff against Flávio Bolsonaro by 51.8% to 48.2%. The result reversed the first round, in which Bolsonaro had outpolled Lula 47.3% to 44.8%, and investors had largely positioned for a Bolsonaro win. Prediction markets had put Bolsonaro's odds at about 80%, according to Yahoo Finance.

The iShares MSCI Brazil ETF, EWZ, was down 28% to $30.66 before the opening bell and fell as much as 26% during the session, which Bloomberg called the biggest drop since the fund's debut in 2000. It recovered part of the drop and closed down 19.82% at $34.15, erasing a rally of roughly 14% earlier in October that had been built on expectations of a Bolsonaro victory. In São Paulo, the Ibovespa fell about 10% at the open, which triggered B3's circuit breaker and a 30-minute trading halt, the first time the mechanism had fired since early 2020, and was down as much as 17% at one point, according to Bloomberg. The real had its steepest slump in more than two decades, with the dollar up as much as 12% against it during the session.

Losses were broad across Brazil-exposed U.S. listings. Payments company STNE was down 30.5% by 10:15 a.m. ET and closed 27.44% lower at $8.33. Digital bank NU was down 25% in the morning and later traded about 16.95% lower at $12.59, while Petrobras ADRs (PBR) fell 21% early and later stood about 13.99% lower at $22.50. MercadoLibre (MELI) was down 15% in morning trading. For the Petrobras-specific angle on fuel prices and dividends, see our earlier story.

The selling reflects policy expectations more than any change in company fundamentals. Investors worry that a fourth Lula term will not take the steps needed to narrow a budget deficit Bloomberg put above 9% of GDP, and fear tax increases, tighter rules for lenders, and more state influence over Petrobras's fuel pricing and payouts. Not everyone thinks the move is justified: Wells Fargo's Alvaro Vivanco called the reaction "overdone," and The Motley Fool argued the drop could eventually prove an entry point while urging caution.

What to watch: the new government's first statements on fiscal targets and on Petrobras, whether Bolsonaro's challenge to the result gains any traction, whether the real stabilizes after its intraday peak, and whether EWZ holds above Monday's lows once the shock fades.