Brazil's Ibovespa Plunges 14% After Lula's Win, but the Country's Volatility Index Is Down 40%

Brazilian stocks had their worst day since March 2020 on Monday after Luiz Inácio Lula da Silva won a fourth term in Sunday's runoff, yet Brazil's volatility index is down about 40%. The Ibovespa fell 13.88% to 176,608, the iShares MSCI Brazil ETF (EWZ) dropped 19.8%, and B3 halted trading for 30 minutes. The calm in the volatility gauge, set against that price damage, suggests traders think the biggest repricing is already behind them.

What triggered the selloff

Lula won the runoff with about 51.8% of the vote against Flávio Bolsonaro, who has refused to accept the result and alleged foul play. Investors had bet the other way: the Bovespa had risen almost 7% and the real nearly 5% before the vote on hopes of a shift toward fiscal austerity. Analysts point to a budget deficit of 7% to 8% of GDP and gross debt near 83% of GDP, and fear more public spending, higher debt and greater state control of the economy during a fourth term.

Monday's tape

Domestic-facing stocks took the brunt, while the dollar-earning exporter Vale rose. The B3 circuit breaker, a 30-minute halt, was the first since March 2020, and the real also slid sharply. Other Latin American markets fell far less than Brazil's.

The volatility puzzle

Brazil's ETF volatility index, VXEWZ, was already elevated before the vote, at 64.13 on Oct. 23, more than double its level of a year earlier, as traders priced in a binary election outcome. It is now down about 40%. A falling gauge after a price collapse is typical of an event that has resolved: implied volatility is largely a measure of uncertainty, and the election result removes the biggest unknown even though the price reaction was violent. Options on EWZ, for example, were pricing roughly 31% volatility for January expiry, less than the fund's realized move before the vote.

The caution is that low implied volatility does not mean the selloff is over. The Bolsonaro camp has not conceded, and fiscal policy is still unclear.

Macro backdrop

September's current account deficit was $5.10 billion, wider than the $4.5 billion forecast, while foreign direct investment came in at $11.29 billion, above forecasts. Analysts flag 169,500 to 170,000 as the first support zone for the Ibovespa, which sits about 15.5% below its 52-week high of 209,067. UBS expects sentiment to stay weak until the government presents a clear fiscal plan, while Goldman Sachs expects only modest spending measures.

Sources: Market data are from exchange, fund and index quotes. Election and macro details are from public statements and market reports. This is informational, not a recommendation to buy or sell.