Market Reacts with Euphoria Between First and Second Rounds of 2026 Presidential Elections

What happened

Between the first and second rounds of the 2026 presidential elections, the Brazilian financial market experienced a significant appreciation. The Ibovespa rose 6.9% during the period, reaching 205,082.56 points on the last trading day before the second round. This surge included the largest single-day gain in six years after the first round, when the index advanced 7.70% and briefly touched 209,000 points, its all-time high. Simultaneously, the dollar fell 4.4% against the real, moving from R$5.21 to R$4.98. Foreign capital was a crucial factor, with net inflows of R$20.15 billion in October, including a record R$10 billion on a single day (October 5).

Why it matters

The market's reaction reflects a sense of relief and optimism regarding the political scenario post-first round. The rise in the Ibovespa and the fall in the dollar indicate that investors, especially foreign ones, interpreted the first-round results as a direction towards an electoral outcome more aligned with their expectations. The closing of long-term interest rates was the main catalyst for this rally, with banks like Goldman Sachs and UBS Wealth Management estimating that this movement explained most of the index's appreciation. The massive inflow of foreign capital reinforces this reading, showing confidence in the Brazilian economy, even during a period of electoral uncertainty.

Market impact

• Interest rates and bonds: The primary driver of the Ibovespa's rise was the closing of long-term interest rates. This tends to indicate an expectation of lower fiscal or inflationary risk in the future, making public debt securities less attractive in terms of yield but increasing the value of companies more sensitive to interest rates (such as retail and construction).
• Dollar and FX: The 4.4% drop in the dollar against the real was directly influenced by the strong positive foreign capital flow. The influx of dollars into the country increases the supply of the currency, pushing its price down. This tends to appreciate the real, benefiting importers and companies with dollar-denominated debt, but potentially harming exporters.
• Equities: The Ibovespa rose 6.9%, driven by falling interest rates and foreign capital inflows. Shares in interest-rate-sensitive sectors, such as retail (Magazine Luiza), construction (MRV), and education, saw significant surges. This tends to indicate an expectation of an improved business environment and increased risk appetite.
• Brazil: The strong inflow of foreign capital and the appreciation of Brazilian assets suggest a perceived improvement in the macroeconomic and political outlook, despite the tight electoral race. This tends to strengthen the economy and may attract further investment in the future.

What to watch

To confirm or invalidate the current market reading, it will be crucial to monitor post-second-round developments, including:

• Economic team announcements: The choices and signals from the elected president's economic team will be fundamental to consolidate market expectations.
• Foreign capital flow: The continuation or reversal of foreign capital flow will indicate whether optimism persists or dissipates after the election outcome.
• Interest rate movements: The trajectory of long-term interest rates, which were the main driver of the rally, will serve as a barometer for fiscal and inflationary risk perception.

Scenarios

Base Scenario: The market maintains its perception of a more stable political and economic environment, with continued foreign capital inflows and lower interest rates, sustaining the appreciation of Brazilian assets. Risk Scenario: An unexpected shift in economic policy or an increase in fiscal uncertainty could reverse the optimism, leading to foreign capital outflows, higher interest rates, and asset depreciation.

Original source: InfoMoney. For information only, not investment advice.