Electoral arithmetic, not economic fundamentals, now moves Brazilian markets

The Brazilian market revealed its principal vulnerability yesterday: it is not the real economy that dictates asset sentiment, but electoral arithmetic — and when the polls tighten, everything moves together.

The Ibovespa fell 1.05%, closing at 204,324 points, pressured by the combination of a statistical tie between Flávio Bolsonaro and Lula in the Quaest and Datafolha polls and the Senate's advancement of the constitutional amendment that eliminates the 6x1 work schedule. The dollar surged in the same session. The contrast with the previous week is striking: the Central Bank recorded net inflows of US$2.415 billion in just the days immediately following the first round, when the market was pricing in a comfortable victory for the PL candidate. That flow, which totaled US$3.214 billion in October through the 9th, reflected the conviction that a change in government would mean greater fiscal discipline. That conviction is now wavering.

Legacy Capital, with R$14 billion under management and a track record of electoral modeling since 2018, is trying to contain the panic. According to economist and partner Leonardo De Paoli, the probability of a Flávio victory remains above 80%, with a base-case scenario of 52% to 48% of valid votes. The firm argues that a statistical tie in the polls does not translate to symmetrical win probabilities, especially with a consolidated electorate and a narrow window for change. UBS BB goes further: in an internal presentation, the bank mapped 120 potential IPOs over the next three years and projects the Ibovespa at 300,000 points — a 43.5% gain over the 209,000 recorded on October 9 — in a scenario of government change and falling interest rates. But the allocators themselves acknowledge that directional bets are modest, because external turbulence — inflation and interest rates in the United States and Europe — reduces the margin of safety for large positioning.

It is in this environment of uncertainty that fiscal policy has become the most revealing battlefield. The Finance Ministry's Prisma report, released on Tuesday, showed that economists worsened their projections for the primary deficit and public debt in 2026. Gross debt has already surpassed R$11 trillion. And yet, the Lula administration accelerated a series of measures with significant fiscal costs in the final stretch of the campaign: benefits mobilized R$298.4 billion in 2026, according to calculations by the Independent Fiscal Institution. The adjustment required in the 2027 Budget to accommodate these initiatives could reach R$39.9 billion. To close out the week, Lula announced a constitutional amendment to guarantee free public transportation on weekends, funded through parliamentary earmarks — a proposal that Flávio Bolsonaro called a "far-fetched promise" and that the market received as yet another source of pressure on assets.

The contradiction is that, parallel to this accelerated spending, the government itself is planning to send Congress, after the second round, an amendment to alter the tax reform — extending the IPI on tobacco, beverages and vehicles to cover delays in implementing the Selective Tax. The reform, approved with great political effort, is beginning to be reopened before it has even fully taken effect. Columnists interviewed by Folha are categorical: delaying or repealing the reform is simply taxing badly for longer.

The 6x1 work schedule dominates the corporate debate with a speed that is surprising. Approved by the Senate 75 to 1, the amendment reduces the maximum workweek from 44 to 40 hours and extends weekly rest to two days, without salary cuts. Analysts point to direct pressure on margins at companies with large workforces — retailers, franchise networks, construction firms, shopping malls. Sectors such as shopping centers, with estimated annual revenue of R$200.9 billion, are already openly discussing passing costs through to consumers. The National Confederation of Municipalities estimates that city halls alone will need to hire 7,100 new employees, at an additional cost of R$442 million per year. There is a mitigating argument: formal workers already, in practice, work hours closer to 40. But regulatory uncertainty — gaps around 12x36 schedules, hour banks and micro and small enterprises — keeps the productive sector on alert.

On the activity front, the data reinforces the slowdown narrative. Retail sales advanced only 0.1% in August, below expectations, after a decline the previous month. The sequence of disappointments — industry, services and now retail — suggests that growth is losing steam. Curiously, the IMF projects that Brazil will rise to become the world's eighth-largest economy in 2027, surpassing Italy and Russia. But this projection coexists with rising household delinquency: searches for financial advisory services grew 38% in September compared to August, according to GetNinjas.

On the post-electoral horizon, the infrastructure calendar offers a constructive counterpoint. The Ministry of Transportation presented a pipeline of 36 new highway auctions through 2030 — a record average of nine per year — with R$54 billion in capex in 2027 alone. Energy, logistics and sanitation concessions complete a pipeline that analysts view as relatively immune to the election outcome. Eneva captured a similar signal of confidence, closing an additional R$1.77 billion investment from Itaú Unibanco in its investment structure. And Conab published its first 2026/27 harvest survey, projecting a record 181.6 million tons of soybeans — data that reinforces agribusiness's position as a structural anchor of Brazil's trade balance.

What to watch in the coming days: the PoderData and CNT/MDA second-round polls, the IBC-Br for August — expected to rise 0.3% — and the impact on assets of the free-fare amendment. The central question remains the same: the market continues to price in a Flávio Bolsonaro victory as the base case. If the polls continue to narrow, Thursday's volatility may be only an appetizer.

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