Bolsonaro's Son Edges Out Lula in Brazil Election First Round, Markets React

Flavio Bolsonaro, the eldest son of former President Jair Bolsonaro, secured first place in the initial round of Brazil's presidential election, capturing approximately 47% of the vote. The incumbent president, Luiz Inácio Lula da Silva, received about 45%. As neither candidate surpassed the 50% threshold, a runoff election will be held in three weeks. With over 99% of ballots counted, the difference between them is approximately 2.3 million votes. This outcome defied some recent polls that had placed Lula ahead. Bolsonaro won in the three major southeastern states: São Paulo, Rio de Janeiro, and Minas Gerais, while Lula maintained strong support in the Northeast, exceeding 60% in Bahia, Ceará, and Pernambuco. Other candidates collectively garnered around 7.5%, with Ronaldo Caiado and Romeu Zema, both identified with the right, potentially influencing the second round.

Financial markets showed a positive reaction to the results. The Ibovespa index in São Paulo rose by about 2.6% on the last trading day before the vote, reaching approximately 192,000 points and completing a nearly 5% gain for the week. In New York, the EWZ, a major ETF tracking Brazilian stocks, increased by about 2.8% to $38.20. Petrobras, the state-controlled oil company, saw its stock climb over 3% to $21.65, nearing its yearly high. Vale, the iron ore giant, added more than 2%. Itaú, Brazil's largest private bank, gained about 6% over the past week, while the digital bank Nubank saw a slight decrease. The Brazilian Real traded around 5.22 per dollar.

Brazilian stocks have trended upward in recent months as Bolsonaro's poll numbers improved. The market views him as a candidate likely to pursue business-friendly economic policies, including public spending cuts and reduced intervention in state-owned companies like Petrobras. Lula, 80, who is seeking a third term since 2023, is associated with expanding social programs and greater state involvement in the economy. During his current tenure, public debt has risen to about 82% of GDP, and major banks estimate that several percentage points of GDP in cuts are needed for stabilization. Brazil's central bank interest rate, the Selic, stands at 14%, one of the highest globally, which increases borrowing costs and slows growth. Market participants anticipate that a government presenting a deficit reduction plan could enable the central bank to gradually lower rates, potentially boosting bank stocks, consumer companies, and government bonds.

Every Brazilian presidential election since 2002 has gone to a second round. Lula himself has won three such runoffs, the last in 2022 against Jair Bolsonaro by less than 2%. The upcoming three weeks are expected to be volatile in the markets, with each new poll and endorsement from eliminated candidates potentially causing fluctuations. Flavio Bolsonaro, a senator from Rio de Janeiro, entered the race in place of his father, Jair Bolsonaro, who is barred from running until 2030 and was sentenced to 27 years in prison for his role in the post-2022 election coup attempt. It remains unclear how closely the son's policies will mirror his father's and his ability to pass reforms in a divided Congress. Brazil is a significant component of emerging market indices, affecting ETFs and index funds. Israeli investors holding such funds are indirectly exposed to the Brazilian election outcomes.