QUOTES-Analysts forecast Brazil market falls after Lula turnaround win

Brazilian President Luiz Inacio Lula da Silva's election victory over Flavio Bolsonaro was set to trigger a sharp ​selloff in its financial markets on Monday. Brazil's stock market hit a record ​high after the first round of the election earlier this ‌month ​pointed to a Bolsonaro win, boosting investor hopes for a more fiscally disciplined government and a wave of pro-business policies.

BARCLAYS ANALYSTS "Lula's victory should trigger disorderly moves in local markets," Barclays analysts said in a note.

"USDBRL could initially go to the 5.50 range...markets ‌will be looking to the Ministry of Finance pick, along with signals about the policy agenda following the campaign promises that would point to a looser fiscal stance." They added that Brazilian sovereign bonds could sell off around 300 basis points in the coming days, mirroring moves after the last election in 2022 when Lula announced his cabinet and less constrained spending plans.

Speculation ‌around a contested election was "typically something markets look through, but could be in the headlines if a potential annulment is discussed." ING STRATEGIST, CHRIS TURNER IN LONDON

"Expect Brazilian markets ‌to be hit hard. USD/BRL gapping 5-7% higher at the open to the 5.20/25 area should be no surprise, while the local Bovespa equity index looks set for double-digit losses." "The moves could turn out to be larger if the external environment deteriorates again and US Treasury yields spike. The fiscal side has always been Brazil's Achilles heel, and a 7-8% budget deficit and 70% net debt-to-GDP ratio leave Brazil vulnerable in a global ⁠bond sell-off."

"Important ​for local financial markets will be how ⁠quickly Bolsonaro accepts the result – or at least allows the constitution to run its course. That is what his father did 44 hours after losing to Lula in 2022, a move that provided some calm to markets." JPMORGAN ⁠ANALYST NOTE

On Equities - "It is important to keep in mind that circuit breakers are likely on Monday: a 10% decline in the Ibov (stock market) leads to a 30 minute market paralysis, a 15% ​decline triggers an additional 1 hour break, and a 20% decline gives the B3 the discretion to suspend trading for the rest of the day. We expect at ⁠least part of that to happen." "In terms of sectors, the domestic cyclicals should fall hard, while exporters should outperform on the back of currency weakness."

JPMorgan's analysts also cut their view on Brazil's government bonds to "underweight", effectively a ⁠recommendation to ​sell. "Brazil’s (bond) spread outperformance vs. BB-rated peers and a greater tilt toward Eurobond financing leaves sovereign credit exposed to a meaningful correction unless - and until - market pressure prompts fiscal concessions."

AVIVA INVESTORS SENIOR PORTFOLIO MANAGER, KURT KNOWLSON "We expect a negative market reaction to Lula’s election victory."

"The announced measures by the Lula administration in the run up to the second ⁠round mean that the starting point for much-needed fiscal consolidation is higher now." "The reality is that Brazilian real weakness and higher long-end and real rates will again be needed ⁠to provide the disciplining mechanism, unless a credible ⁠fiscal path can be announced in short order."

CAPITAL ECONOMICS' ANALYST, WILLIAM JACKSON "Lula’s surprise win in the second round of Brazil’s presidential election will dash hopes for reforms that would improve the public finances and strengthen growth prospects. A sharp fall in the real and ‌equities and a rise in ‌bond yields, more than reversing the rally since the first-round vote, are likely."

(Compiled by Marc ​Jones and Sruthi Shankar; editing by Alexander Smith)