Brazil hasn't elected a new president yet, but the iShares MSCI Brazil ETF (EWZ) is trading like the race is already over. The exchange-traded fund jumped more than 14% in early trading on Monday, after right-wing Senator Flávio Bolsonaro finished ahead of President Luiz Inácio Lula da Silva in Sunday's first round.
If the gain holds through the close, it will be EWZ's best day since March 13, 2020.
In São Paulo, Brazil's main stock index, the Ibovespa, rose 9%, setting a fresh record high.
Bolsonaro's margin was less than 2 percentage points, and the decisive runoff isn't until Oct. 25. So why are investors pricing the result three weeks early?
What Happened On Sunday
Senator Flávio Bolsonaro, the son of former Brazilian President Jair Bolsonaro, took 47.03% of valid votes.
Lula took 45.16%, with the Superior Electoral Court (TSE), Brazil's electoral authority, counting 99.99% of polling stations.
Neither candidate passed 50%, so the two meet again in a runoff on Oct. 25.
The result ran counter to the final polls. Private surveys had shown Lula ahead by about 3 points in the first round.
The comparison with 2022 shows how far the race has moved. Back then, Lula won the first round with 48.43% against 43.20% for Jair Bolsonaro, Flávio's father.
Gustavo Medeiros, head of research at emerging-markets manager Ashmore Group, put the swing in numbers.
"Flávio Bolsonaro took 47.0% of valid votes against Lula's 45.2%, improving on his father's 2022 result by 3.8 points, while Lula fell 3.2 points," Medeiros said in a Monday note.
He also ruled out low turnout as the explanation. Abstention reached 21%, about two points above its historical average.
The Oct. 25 runoff is not a foregone conclusion, but the arithmetic favors Flávio, he said.
Companies With Domestic Credit, Interest Rate Exposure Rally
The iShares MSCI Brazil Small-Cap ETF (EWZS) rose 15.4%, more than the large-cap fund.
The rally spilled over to other Latin American stocks listed in New York.
MercadoLibre Inc. (MELI), which generates its largest share of revenue in Brazil, rose 8.1%. Payments company DLocal Ltd. (DLO) gained 6.8%.
Argentine banks also moved higher, with Grupo Financiero Galicia S.A. (GGAL) up 4.8% and Banco Macro S.A. (BMA) up 4.3%.
The iShares Latin America 40 ETF (ILF), where Brazil carries the largest weight, climbed 7.8%.
The Fiscal Question Behind The Move
Brazil's public debt is the reason the election matters so much to markets.
Medeiros said gross debt stands at about 82% of gross domestic product (GDP), the total value of what the economy produces in a year.
"Anchoring fiscal policy on debt, with spending frozen while gross debt exceeds 65% of GDP (it is about 82% today), alongside an adjustment of around 1.5% of GDP within 18 months, would be a credible break with the past," he said.
If delivered, he added, it could put Brazil back on the path to investment grade, the credit rating that marks a borrower as low-risk, within four to six years.
Andrés Abadía, chief Latin America economist at Pantheon Macroeconomics, expects "another extremely tight race." Bolsonaro remains the slight favorite, he explained, noting that most votes for eliminated candidates went to center- and right-leaning candidates. That gives Bolsonaro a larger pool to draw from on Oct. 25.
Abadía also warned that the rally needs fiscal follow-through.
"Brazil's next president will inherit rising mandatory spending, high debt-servicing costs and limited budget flexibility," he added. "Sustaining any initial rally will require a credible plan for the public finances."
Polymarket traders now assign an 84.5% probability to a Bolsonaro victory. Lula's odds have fallen to 15.5%.
