Foreign capital bets on fiscal fix while Lula's spending commitments complicate any adjustment path.

The Brazilian market entered this Monday facing what could be the most decisive week for domestic assets in years, with the runoff election set for next Sunday and an increasingly stark tension between foreign capital optimism and the real fragility of public finances. According to Valor Econômico data, R$18.5 billion in foreign funds have flowed into the stock exchange since the first round, betting on a victory by Senator Flávio Bolsonaro (PL) as a catalyst for fiscal adjustment. At the same time, a package of electoral measures from the Lula administration has already reached R$290 billion in commitments for 2026 and 2027, generating explicit pressure on the trajectory of public debt — which the government itself projects to approach 90% of GDP by 2029.

This is the central contradiction of the moment: the market is pricing in a Flávio victory as a guarantee of fiscal consolidation, while the weight of measures already announced by Lula — which any successor will inherit as a fait accompli — makes structural adjustment harder for whoever wins. Felipe Salto, chief economist at Warren Investimentos and one of the country's leading public finance specialists, warned that the senator's election would not automatically ensure the organization of public finances, requiring an immediate plan whose effects would necessarily be gradual. It is a warning the market, in its post-first-round euphoria, has chosen to ignore — at least for now.

Sunday's presidential debate on Band failed to bring enough clarity to dispel this ambiguity. Lula defended growth as a mechanism for fiscal adjustment and cited Desenrola as an instrument to contain household debt; Flávio proposed spending cuts, the sale of federal real estate, and state purchases of bank debt with grace periods. Both pledged to protect the poorest and supported ending the 6x1 work schedule, but diverged on its economic causes and consequences. The clash was largely consumed by personal attacks, with neither candidate presenting numbers that could withstand market scrutiny.

The external backdrop adds another layer of uncertainty. Worsening inflation expectations in the United States and Europe have fueled global volatility, and the interest-rate differential that made Brazil attractive has narrowed: the local curve has tightened by more than two percentage points since the first round, but the real has strengthened, boosting dollar-denominated returns for foreign investors. On Friday, the dollar closed at R$5.072, down 0.30%, reflecting both the global weakening of the greenback and the technical tie in electoral polls. The DI for January 2031 traded at 12.78%, having given back about a third of the decline recorded after the first round — a sign that the market is beginning to recalibrate the excess of its initial euphoria.

In this environment, the start of Bolsa Família payments with a 15.04% readjustment — approved less than three weeks before the first round — is the most visible example of a fiscal policy that mixes legitimate social intent with deliberately electoral timing. To absorb part of the cost of these measures, the government will send Congress a proposal to reallocate roughly R$20 billion within the 2027 budget, attempting to demonstrate formal responsibility without reducing total spending. The arithmetic, economists say, does not add up.

Tax reform has also entered the equation: the Finance Ministry is studying sending Congress, after the runoff, a constitutional amendment to extend the IPI on tobacco, beverages, and vehicles, covering a delay in the regulation of the Selective Tax. These are technical adjustments with non-negligible fiscal impact, little followed by the public but closely monitored by fixed-income managers.

In the productive sector, the implementation of the end of the 6x1 schedule — which takes effect on December 15 — continues to generate turbulence. A study by FGV Ibre estimates that the new workweek could raise labor costs by up to 20% and cause a 2.9% drop in GDP and productivity, though without generating net unemployment. About 14.8 million formally employed workers were under this regime in December 2025, according to the Labor Ministry — the equivalent of three out of every ten formal jobs. The oil sector, with 70,000 workers in special offshore regimes, was among the first to raise concerns about legal uncertainty. Finance Minister Dario Durigan announced credit lines and training programs for companies in adaptation — a measure the market viewed as palliative given the magnitude of the structural change.

The week also brings the release of October's IGP-10 — forecast to rise 1.44%, reflecting the acceleration in food prices, which climbed 0.83% in September's IPCA after three months of decline — along with a new edition of the Focus Bulletin and trade balance data. New electoral polls from AtlasIntel and PoderData will be released today and should move domestic assets. With the runoff six days away, any shift in voting intentions will have a direct impact on the yield curve, the exchange rate, and the stock market. What the market has not yet accurately priced in is the scenario in which neither candidate, once elected, delivers the adjustment that capital flows have already anticipated.

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