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Brazilian Real Plummets 12% Against Dollar After Lula Wins Presidential Election
Brazil’s real depreciated 12% against the U.S. dollar in spot trading early Monday, reaching 5.60 per dollar, following the election of leftist President Luiz Inacio Lula da Silva. The market reaction came after Lula defeated right-wing Senator Flavio Bolsonaro in a runoff election that saw the lowest abstention rate since 1989.
Markets React to Unexpected Outcome
Analysts at Citi noted that the election result was received negatively by financial markets, as it ran contrary to general investor expectations. According to a note from the bank, the outcome reinforces the downside risk that its pre-election survey had highlighted.
The negative sentiment extended to Brazilian equities. Shares of PBR, a major state-owned enterprise, dropped 23% in pre-market trading, reflecting investor anxiety about potential shifts in economic policy under the new administration.
AdInvestor Concerns Center on Fiscal Policy
The sell-off in Brazilian assets is rooted in concerns about the country's future fiscal policy, the management of state-owned companies, and the broader reform agenda, according to Citi. The bank's investor survey had pointed to a clear "asymmetric reaction function," with market participants anticipating a much larger negative impact from a Lula victory than any potential upside from the alternative scenario.
Despite the broad market downturn, Citi stated that it believes its selected "Lula picks" are now positioned to outperform on a relative basis.
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