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Newsquawk Brazil Analysis: President Lula unexpectedly wins fourth term, although Bolsonaro challenges it

Newsquawk Staff ·

  • In a surprise result, Brazil's left-wing President Lula won a surprise fourth term, defeating challenger Flavio Bolsonaro.
  • Bolsonaro was widely touted to win the election, especially after the first round results, and he said he will challenge the results.
  • According to Brazil's Superior Electoral Court, Lula secured 51.79% of the votes, vs. Bolsonaro's 48.21%.

LULA'S POLICIES

  • His recent support, and hailing the discovery of oil near the mouth of the Amazon river has drawn criticism, and he said the find by Petrobras, could be "a passport to the country's future."
  • However, he does still insist that he remains committed to eventually phasing out fossil fuels and argues that oil revenues are key to financing Brazil's transition to clean energy.
  • Soybean futures fell to a two-month low following Lula’s re-election; his victory has raised expectations of closer Brazil-China trade ties, potentially strengthening Brazil’s position as China’s leading soybean supplier at the expense of US exporters.

POST-RESULTS

  • Given the surprise result, notable market reactions have been seen, with Brazilian assets coming under pressure. In US pre-market trade, Brazil ADRs are being hit hard, with highlights being Braskem (BAK) -33%, Itau Unibanco (ITUB) -26%, Petrobras (PBR) -22%, Vale (VALE) -4.5%, and Brazil ETF EWZ -25%.
  • Morgan Stanley warns of a Brazil market sell off, and sees a 20%–30% drop in Brazilian equities.
  • MS sees USD/BRL reaching 5.60, potentially 6.00 if fiscal concerns worsen, alongside 300–400 bps of pressure on interbank rates.
  • Overall, the rising fiscal risks threaten the real, bonds, and equities.
  • Following the first-round results, the inflation-adjusted 25-yr bond yield fell to 6.57% from 7.25%, and the Ibovespa index added 6.75%, so desks wrote more than reversing those changes is a minimum baseline for projecting future moves.

CONTESTATION

  • Bolsonaro said the result was "inexplicable" and has called for it to be annulled, although Brazil's TSE has confirmed the result and desks note the chances of an annulment are remote. Voting was extended by two hours after a request from both campaigns.

US RELATIONS

  • We have not yet heard from US President Trump following the result, and as we know Bolsonaro had Trump's backing, and one of his pledges was that Brazil would join the Shield of the Americas.
  • However, as Lula was victorious, it keeps LatAm's biggest economy at odds with the US, and Trump may act accordingly.

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