Lula's Reelection Triggers Market Rout, Central Bank Autonomy at Risk

The environment Copom faces this Wednesday as it decides on the Selic rate is the most politically charged in years — and the tension between central bank orthodoxy and the heterodox thinking beginning to circulate in the corridors of the Planalto is the thread running through virtually every move in Brazilian markets this early November.

Luiz Inácio Lula da Silva's re-election to an unprecedented fourth term triggered one of the most destructive weeks in B3's recent history. The Ibovespa fell 18.12% over five consecutive down sessions — the worst weekly performance since March 2020 — sliding from above the 200,000-point mark to 167,922 points, while dollar futures jumped nearly 10%. Listed companies shed roughly R$963 billion in market value. The investment fund industry saw a R$157.5 billion drop in assets due to negative returns over the period, with equity funds posting double-digit losses, according to Economática data. Among the most heavily traded names, Banco do Brasil (BBAS3) led the losses with a 33.37% weekly decline; Itaú Unibanco (ITUB4) fell 19.69%; and Petrobras (PETR4) lost 9.73%. Vale (VALE3) was the exception, edging up 0.24%.

It is against this backdrop of devastation that Copom convenes. Of the 105 banks and consultancies surveyed by Valor Econômico, 72 bet on the Selic being held at 13.75% per year, versus 33 still projecting at least one more 25-basis-point cut. In options traded on B3, the probability of a hold reached roughly 70% at Thursday's close, with residual bets even on a rate hike — something unthinkable two weeks ago. Itaú, for its part, slashed its 2027 growth forecast to less than half of its previous call, now at just 0.5%, and shifted to projecting inflation well above the ceiling of the target range for next year. Consultancy Kearney projects average growth of just 1.7% per year through 2028.

What amplifies the market's apprehension goes beyond the election result itself. Valor Econômico reported that Lula could appoint six Central Bank directors by the end of 2027 — two seats have been vacant since January, two additional appointments are possible by February, and two more openings arise in December 2027. The fear is that the board's profile will shift toward names more aligned with the heterodox view gaining traction. According to Valor, the re-elected president is actively seeking heterodox names for Copom with the goal of bringing the Selic down — contradicting the signal of technical autonomy the market expects from the institution.

The most disturbing episode of the week was the circulation, among government officials, of a proposal from economist André Lara Resende — one of the architects of the Plano Real — to cap the Selic through a new arrangement between fiscal and monetary policy. The mere internal review of the idea was enough to trigger immediate market reaction. Economists interviewed by Valor characterized the proposal as a threat to inflation and to long-term interest rates. Finance Minister Dario Durigan rushed to deny that interest rate controls are "on Lula's table," but the denial came packaged with political noise: PT allies in Congress, including congressmembers Lindbergh Farias and Gleisi Hoffmann, stepped up attacks on the financial market and the Central Bank, accusing analysts of "blackmail, terrorism and speculation." In parallel, economist José Sergio Gabrielli, coordinator of Lula's government platform, published an article arguing that Brazil's fiscal situation is "less dramatic" than proponents of adjustment claim — a stance that, even if nuanced, poured fuel on the fire.

The only tangible signal of moderation came from the re-elected governor of Piauí, Rafael Fonteles (PT), tipped for the Finance Ministry, who posted on social media the phrase "Long live fiscal balance" when announcing the reappointment of his state finance secretary. The gesture was read as a nod to the market, but its effectiveness depends on Fonteles actually taking the post — and on whether he will have real influence over the economic policy of the fourth term.

Gross government debt has already reached 82.9% of GDP in September, the highest level since 2021 and well above the 76.5% the government projected when it launched the fiscal framework in 2023. The 11.3% CBS rate disclosed by TCU is expected to raise the federal tax burden on consumption in 2027 — and the tax reform already faces implementation delay risks, with regulatory loose ends including the lack of regulation for the Selective Tax and the unpreparedness of many municipalities for the new electronic invoicing system.

Offering some counterpoint to the domestic gloom, agribusiness provides relief: soybean planting for the 2026/27 crop reached 53% of planned area as of October 29, up from 47% in the same period a year earlier, according to AgRural. Even more telling is live cattle, with the arroba approaching R$400, a record level driven by the resumption of Chinese buying, strong exports to the United States, tight animal supply, and the weaker exchange rate itself — which favors exporters but burdens domestic beef consumers. The stronger dollar, compounded by the El Niño weather pattern, is already prompting upward revisions to IPCA projections by economists, adding inflationary pressure at a moment when Copom is considering closing the cutting cycle.

On the external front, Brent crude fell 7.17% on Monday to US$101.70 per barrel, after diplomatic signals from the American and Iranian governments reduced the geopolitical risk premium. The drop eased Wall Street and contributed to a pullback in Treasury yields, but the effect on Brazil is limited as long as uncertainty persists over the direction of Lula 4's economic policy.

What to watch in the coming hours and days is straightforward: the Copom decision on Wednesday and, more importantly, the tone of the accompanying statement — especially any signal regarding the balance of risks and the forward path of the Selic. Next, the first names announced for Lula's economic team in the new term will be the most concrete gauge of whether the government intends to signal fiscal responsibility or confirm the heterodox fears that have already cost the country nearly a trillion reais in market capitalization in a single week.

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