Markets react to Brazil’s first round: dollar falls below R$5 and Ibovespa surges

Brazilian financial markets opened sharply higher on Monday (5) after the first round of the presidential election. The commercial dollar fell below R$5, while the Ibovespa gained strongly on the B3 exchange.

At the opening, the U.S. currency dropped by more than 4% after closing the previous Friday above R$5.20. During the session, the stock market gained momentum: reports indicated an increase of more than 8% in the Ibovespa, with an even stronger rise in shares of companies more exposed to Brazil’s domestic economy.

Why did the election result move Brazilian assets?

The reaction followed Flávio Bolsonaro finishing the first round ahead of Lula — 47.03% to 45.16%, according to the reported count. For market participants, the result increased the perceived probability of a different economic direction after the October 25 runoff.

Markets are pricing expectations, not certainty: greater fiscal discipline, reforms and a possible reduction in Brazil’s risk premium. When investors see lower risk in public accounts, demand for Brazilian shares and bonds tends to rise. That can strengthen the real, weaken the dollar and push future interest rates lower.

What the market move does not prove

The move is not a definitive forecast of the election result. The runoff remains open, and the dollar and the stock market also depend on U.S. interest rates, global capital flows, commodity prices and new election polls.

In short: the stock market rally and the weaker dollar reflect a market bet on the scenario that appeared more likely after the first round — not a guarantee of what will happen on October 25.

Sources: UOL, Reuters via BOL and InfoMoney.