Lula Won Brazil's Runoff at 20% Odds, Bolsonaro Wants It Annulled, and Brazilian Stocks Are Plunging

Markets bet on Flávio Bolsonaro and lost. On Sunday morning, prediction markets gave him roughly an 80 percent chance of winning Brazil's presidency. By the night, Luiz Inácio Lula da Silva had come back from a first round loss to win an unprecedented fourth term, and Brazilian assets are now being dumped.

Lula took 51.8 percent of valid votes to Bolsonaro's 48.2 percent, according to the Superior Electoral Court, a margin of nearly 4.4 million votes. It is the first time since direct elections returned in 1989 that a candidate has won the runoff after losing the first round. Lula, 80, will govern from 2027 to 2030.

No concession

Bolsonaro refused to concede and, as Reuters reported, said he would seek to have the result annulled. He called Supreme Court Justice Cristiano Zanin's ruling to extend voting by two hours "unacceptable."

The extension followed reports from Lula's campaign that public transport had been suspended in key areas. Bolsonaro's own campaign had also asked for more time, after heavy rain shut polling stations in the south, a right wing stronghold.

The selloff

Investors had priced in the opposite outcome. Brazilian markets had rallied on Bolsonaro's first round lead, since he was seen as more likely to push austerity and deregulation. ING's Chris Turner had forecast the currency and bonds would rally on a Bolsonaro win.

Instead, the iShares MSCI Brazil ETF plunged nearly 20 percent in overnight trading. In Monday premarket moves, the fund was down 26 percent, Petrobras was down 23 percent and MercadoLibre 8 percent.

A prediction market miss

The betting markets got it badly wrong. Polymarket and Kalshi both had Bolsonaro around 80 percent on Sunday morning. On Kalshi, Lula went from 20 percent to 70 percent on the heaviest volume of the market's life, as trader Michael McDonough put it on X. Polymarket's Brazil market drew more than $249 million in volume, even though prediction markets are banned in Brazil.

Bloomberg's Joe Weisenthal asked whether it was "shaping up to be one of the biggest prediction market whiffs of all time." Nic Carter wondered if it was simply "normal variance that happens one in every five times."

What investors now have to price

The fiscal picture is what scares markets. Brazil's gross debt hit 82.9 percent of GDP in August, the highest since March 2021, according to the central bank. And Lula will face a Congress where Bolsonaro's Liberal Party holds the largest bench in decades.

Goldman Sachs expects "modest measures" to contain spending growth, plus further increases in an already high tax burden, with major structural reforms unlikely. Alejo Czerwonko of the Atlantic Council says Lula will need to convince investors that Brazil can stabilize its debt, and will likely keep a "gradual approach."

There is a geopolitical layer too. Trump had called Bolsonaro's first round lead "a very, very big victory," and Lula has sparred with him publicly. The result blocks a rightward shift in Latin America that Trump backed, and leaves markets holding a leftist president, heavy debt, a hostile Congress and a contested result.

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