Brazil markets set to rally as Bolsonaro leads in first round vote

Brazilian markets are expected to rally on Monday after right-wing senator Flavio Bolsonaro outperformed private poll predictions and took the lead in Sunday's presidential election first round, analysts told Reuters. Bolsonaro and his chief rival, President Luiz Inacio Lula ‌da Silva, were the frontrunners in a field of 12 candidates in a campaign dominated by concerns over the cost of living, corruption and crime.

The son of former President Jair Bolsonaro, who is serving a 27-year sentence for plotting a coup after losing the 2022 election, won 47% of the votes cast, exceeding polls, and will face Lula, who secured about 45%, in a runoff this month. Polls had forecast Lula would lead the first round ‌of voting by around three percentage points.

While Brazilian markets were still closed, overseas trading pointed to a strong start for them when they open. The Frankfurt-listed MSCI Brazil ETF jumped more than 16%, while overseas-listed ‌shares of Brazilian companies including Itau Unibanco and Petrobras posted gains. Brazil's international debt also rallied, while broader fixed income markets were jittery. The 2056 bond was up 1.4 cents on the dollar to bid at 93.5 cents, Tradeweb data showed.

"We expect a strong rally across Brazilian assets," said Thierry Larose, portfolio manager at Vontobel. Bolsonaro has pitched himself to investors as a "more centered" version of his father, with a pro-market agenda including tighter public spending, privatizations and lower taxes.

"It remains to be seen whether Flávio Bolsonaro would ultimately prove more ⁠fiscally responsible ​than Lula would be in a fourth presidential term. However, ⁠markets are likely to give him the benefit of the doubt," Larose said. 'MARKETS WANT CHANGE'

Analysts also expect the real, trading around 5.22 per dollar, to strengthen. Societe Generale forecasts it will firm to 5.10 by end-2026, with scope to move below 5.00 in ⁠the first half of 2027. A Reuters poll published on Friday found the real could strengthen by as much as 4.6%, to 5.00, in the immediate aftermath of the vote if Bolsonaro won the first round.

"The market wants change, it wants ​reform, it doesn't want a high public deficit; with the current government, all of this will continue," Pedro Galdi, investment analyst at the AGF Investments platform, told Reuters. Four years ago, Brazil's currency strengthened ⁠more than 4% against the dollar and the benchmark Bovespa equities index jumped 5.5% the day after then-President Jair Bolsonaro's stronger-than-expected first-round showing against Lula.

A similar move could unfold on Monday, said Ivo Chermont, chief economist at Quantitas. "Investors will wake up on Monday to a very ⁠powerful ​rally across asset classes," Chermont said. "We're probably talking about the dollar falling somewhere in the 2% to 4% range, equities rising perhaps 4% to 6%, and both nominal and real interest rates tightening significantly."

Bolsonaro's strong showing is likely to boost market confidence in the near term, said Bryan Harris, a managing partner at Sabio. "The market will be looking for clear signals from Bolsonaro that he is serious about tackling the country's problems," Harris ⁠said.

Jair Bolsonaro went on to lose to Lula in the second round and was subsequently convicted of trying to carry out a coup to overturn the result. WARNINGS OF INTERFERENCE

Lula allies warned before Sunday's vote ⁠that the Trump administration could refuse to recognize a Lula ⁠victory, citing a blocked US observer mission. Trump did not formally endorse a candidate but has hosted Flavio Bolsonaro at the White House and praised him publicly.

Others had warned of outside interference. Reuters reported last week that Brazilian intelligence briefed French and German officials on alleged US and Russian interference before the election, claims Washington ‌rejected.