Lula’s surprise comeback sets Brazilian assets up for a sharp repricing
26 OCT, 2026
By Joanna Piwko from RankiaPro Europe
Luiz Inácio Lula da Silva has won a fourth, non-consecutive term as Brazil's president, defeating Senator Flávio Bolsonaro in Sunday's runoff with 51.76% of the valid votes against 48.24%, according to the electoral court (TSE). The result reverses the first round on 4 October, when Bolsonaro led with 47% to Lula's 45%, and leaves investors facing an abrupt repricing of Brazilian assets.
The night was far from orderly. A last-minute decision by a Supreme Court justice to extend voting by two hours caused chaos at polling stations, and Bolsonaro has so far refused to concede, calling for the result to be annulled despite trailing by nearly 4.4 million votes.
Markets had priced the other outcome
For Thierry Larose, portfolio manager and analyst at Vontobel, the upset goes well beyond the chaotic close of polling day. Beyond the chaotic end to election day, Lula's victory is a surprise in itself, he says. The final polls pointed to a very tight race, while prediction platforms had Bolsonaro winning comfortably.
Brazilian assets had moved accordingly. Larose notes that they had already priced in a market-friendly outcome, on the expectation that a Bolsonaro government would swiftly carry out a deep fiscal adjustment. By Friday's close, Brazilian equities stood almost 7% above their pre-first-round level and the real had gained nearly 5% against the dollar.
The first signals from overseas trading point to a sharp unwind. A Tokyo-listed Ibovespa ETF fell close to 15% in Asian hours and November real futures dropped around 10%, although volumes were thin ahead of the São Paulo open.
Fiscal consolidation – necessary, but enough?
In Vontobel's view, the new Lula government will also have to tighten public finances. We believe the Lula government will have no choice but to undertake fiscal consolidation measures as well, Larose says. However, most investors doubt they will be sufficient to put debt sustainability back on track.
That scepticism shapes his call for Monday. Larose expects a strong wave of selling at the start of Monday's session, with a significant repricing of government bond yields, a much higher DI curve – the Depósitos Interfinanceiros curve, one of the main interest rate benchmarks for Brazilian debt – and a markedly weaker Brazilian real (BRL). At a minimum, the losses should reverse the gains recorded on the day after the first round, he adds.
The scale of the move matters locally: a fall of 10% or more in the Ibovespa triggers a circuit breaker that halts trading for 30 minutes.
A sell-off with limits
Larose does not expect the adjustment to spiral out of control. That said, the sell-off should ultimately find some limits, he says. Both the central bank in the foreign exchange market and the Ministry of Finance in the government bond market have considerable capacity to prevent the adjustment from becoming entirely chaotic.
Beyond the São Paulo open, investors will look for early signals from Lula's camp on fiscal policy – starting with the choice of finance minister and the shape of the 2027 budget – as well as any legal challenge from Bolsonaro over the extended voting hours.
