Brazilian stocks surge on election poll shift, not economic strength

Brazil's financial markets wrote their most eloquent sentence of the week not with economic data, but with an electoral poll: the Ibovespa surged 3.05% on Wednesday, closing the session at 185,205 points and notching its 11th consecutive gain, while the dollar retreated to R$5.10 after Quaest revealed that Flávio Bolsonaro (PL) is closing in on Lula (PT) in the presidential runoff. The tighter race — with Lula at 37% and Flávio Bolsonaro at 30% in the first round, according to the poll — rekindled market expectations of a political turnaround with fiscal implications, knocking down the risk premium associated with a PT government victory. The move is telling: the money flowing back into equities isn't betting on a more benign macro scenario, but rather on a change of fiscal regime.

This political reading contrasts with a macroeconomic picture that continues to deteriorate in slow motion. Second-quarter GDP grew just 0.5% quarter-on-quarter, with household consumption losing steam and growth increasingly reliant on agribusiness — whose sector GDP advanced 6.8% year-on-year — and oil production. The combination is leading economists to project expansion of only around 2% for 2026, the slowest pace since 2019, excluding the pandemic period. Industrial output attempted a timid recovery in July, rising 0.2% from June according to IBGE, insufficient to offset the weakening of domestic consumption, which is being aggravated by household indebtedness that the Central Bank, in the Comef minutes released this week, described as being at a "historically high level." The BCB itself signaled that it is preparing new macroprudential measures in the credit market — a tightening signal that is likely to further squeeze household spending.

The fiscal outlook for 2027 hardly inspires confidence either. The Annual Budget Bill sent to Congress projects a primary surplus of R$18.6 billion, but the math depends on a growth projection of 2.46% that diverges significantly from the 1.5% expected by the market, according to the BCB's Focus Bulletin. Economists warn that a sharper slowdown would produce a shortfall in revenue and render meeting the target virtually unfeasible without additional cuts. Not coincidentally, businesspeople and bankers gathered with Lula at the Palácio do Alvorada this week called for economic stability and complained about elevated interest rates — a scene that encapsulates the tension between a government that needs growth to pay its bills and a market that demands fiscal adjustment before letting rates come down.

The environment of elevated long-term rates is itself a global phenomenon that Brazil cannot insulate itself from. The U.S. 30-year Treasury topped 5.20%, its highest level since 2007; the German 10-year Bund broke through 3.3%, a peak since 2011; U.K. gilts are at nearly a three-decade high. In this context, the traditional correlation between rates and equities — which implies declines in stocks when yields rise — appears to have broken down temporarily in Brazil, with the Ibovespa aiming for 200,000 points driven by the electoral factor, not by rate dynamics. The question analysts are beginning to ask is how long this decoupling can be sustained.

On the trade front, Brazil took a significant blow with the European Union's decision, effective Thursday, to suspend imports of Brazilian beef, poultry, and eggs. The sector, which had found in the European market a buyer willing to pay premium prices, is now scrambling to reverse the measure diplomatically — but the immediate impact on exporters is already concrete. The episode adds to a week of legislative decisions with major structural reach: the Senate approved the legal framework for critical minerals and rare earths, with R$5 billion in tax incentives and the creation of a government council with veto power over international partnerships — a signal of sovereignty over strategic resources that will please part of the domestic market, but which could generate friction with foreign investors. In parallel, the Senate also approved Redata, a special tax regime for data centers, signaling Brazil's positioning in the race for artificial intelligence infrastructure. Also not going unnoticed in this context was the Central Bank's negotiation to connect Pix to TIPS, the European instant payments platform — an integration that, if completed, would give Brazil's payments system unprecedented cross-border reach for an emerging economy.

In retail, Magalu sealed a partnership with Mercado Livre to sell 27,000 items from its portfolio — including products from KaBum and Época Cosméticos — on the Argentine platform, whose shares are traded on Nasdaq under the ticker MELI. Magalu shares reacted with a 16.88% jump, reflecting the market's understanding that the company has found a path to grow in the digital channel without bearing the customer acquisition costs that had made organic growth unprofitable. On the other side of the retail spectrum, Casas Bahia, in judicial reorganization with liabilities estimated at R$28 billion, cut 90% of its television advertising contracts and dropped its sponsorship of the Brasileirão on CazéTV, while asking the courts for protection against the termination of essential contracts — from electricity to employee healthcare — by suppliers threatening to break them.

In aviation, Petrobras raised the price of jet fuel by 13.9%, an impact that, according to Abear, is equivalent to the loss of 225,000 passengers per real added to the liter of fuel — with the price hikes accumulated over the year having already added R$6.3 billion to airlines' costs. Azzas 2154, in turn, announced its own dissolution: the group born from the merger between Arezzo&Co and Soma will be split back into the two original brands, with a separate structure for Farm Rio, after an impasse between founders Alexandre Birman and Roberto Jatahy. The shares climbed 11.28% on the announcement — the market celebrating the end of a marriage that never worked.

In the coming weeks, investors will closely watch the floor vote on the MP eliminating the "blusinhas tax" — which has already cleared the special committee —, developments in the negotiations surrounding Rumo, where Cosan is in talks with a consortium formed by COFCO and Bunge over the sale of a 15% stake amid a governance impasse, and any new electoral poll that continues to calibrate the market's appetite for domestic risk. The 2027 budget will have to overcome not only congressional scrutiny, but also the growing distrust that its growth assumptions are incompatible with the global rate environment in which Brazil now operates.

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