Market Shock! Lula Surprises in Second Round Election and Wins Record Fourth Term

Brazil's incumbent President Luiz Inácio Lula da Silva pulled off a comeback in the presidential run-off, defeating his opponent Flávio Bolsonaro with a vote percentage of 51% versus 49%, securing his unprecedented fourth term. This result broke the historical record since Brazil’s return to democracy in 1989, as no candidate had ever managed to overturn a first-round deficit in the run-off. Additionally, the outcome contradicted predictions that the 80-year-old political veteran’s career was at its end.

According to Brazil’s Electoral Court, the result was based on 73% of votes counted as of 8:48 pm on Sunday evening. Data institute Datafolha promptly predicted Lula’s victory. The election day itself was full of unexpected events, including allegations of voter suppression and a temporary extension of voting hours. Ultimately, massive turnout in Lula’s stronghold, the Northeast, enabled him to reverse the results at the last moment.

Previously, right-wing senator and former President Bolsonaro’s son, Flávio Bolsonaro took the lead in the first round of voting. Historically, since Brazil’s democratization in 1989, no candidate trailing in the first round had managed a comeback in the run-off, making Lula’s chances look grim for a time.

According to Bloomberg, Lula’s return signals a continuation of the current policy framework for the market, but the unresolved core issues of high fiscal deficit, debt burden, and interest rates persist. He has promised fiscal restructuring but has not outlined a specific pathway and has explicitly stated he will not sacrifice the social agenda to appease financial markets—an approach that is likely to sustain investor concerns over Brazil’s fiscal sustainability.

After the election results were announced, ETFs tracking the Brazilian stock market plunged 13% in the Japanese market. Previously, markets had generally bet that Flávio Bolsonaro was keener to pursue fiscal austerity, while Lula has traditionally focused on stimulating consumption to drive growth rather than tackling Brazil’s entrenched fiscal troubles. Creomar de Souza, a Brazilian political analyst and founder and CEO of Dharma Political Risk and Strategy, commented:

“He may think he has won himself a pass, but he has secured re-election in an environment where institutions are fragile.”

Narrow Victory: Election Day Surprises and Market Shock

Lula's victory this time is considered a textbook political comeback. After the first-round voting on October 4, Flávio Bolsonaro was in first place and seemed confident of securing the win—as there had never been a precedent in Brazil’s post-democratic history for a trailing candidate to overturn the result in the run-off.

However, Lula immediately launched a counterattack. He rolled out a series of policy initiatives targeting household financial pressure, including raising the benefits of the "Bolsa Família" program, banning online gambling, introducing a broad consumer debt refinancing program covering private banks, and even distributing weight loss injections to citizens through the public health system.

In the final 15 days before the run-off, Lula focused on absentee and undecided first-round voters, especially targeting the densely populated Northeast—a region where loyalty to him runs deep and ultimately became the anchor for his victory.

It's noteworthy that the run-off was far from smooth. Allegations of voter suppression appeared on election day, voting hours were temporarily extended, and there were moments of chaos. Ultimately, Brazil’s Electoral Court declared Lula the winner, with a margin of just about 3.5 percentage points—the narrowest of his four electoral victories.

For the market, the outcome was a clear negative. Investors had previously flooded into the Brazilian market, betting that Bolsonaro’s camp would commit to fiscal discipline—even though Flávio Bolsonaro himself had yet to present detailed spending cut plans. Lula’s win broke this logical thread, prompting a rapid market reaction and a sharp drop in Brazil stock-related ETFs in the Japanese market.

Lula’s victory was also in part due to concentrated support from voters in Brazil’s poorest regions, a core base that helped widen his lead at the decisive moment.

Fourth Term: An Unprecedented List of Challenges

Lula made history by winning another term, but he now faces an extraordinarily complex governing challenge. Economically, rising fiscal deficits and debt levels continue to push up interest rates, driving Brazilian households into deeper debt—the personal loan default rate is now at its highest in nearly 20 years.

The ongoing expansion of deficits and debt has kept Brazil’s interest rates high, which pressures corporate financing and leaves ordinary families mired in debt—personal loan default rates are now at their two-decade peak.

There are doubts about Lula’s ability to effectively address these issues. His policy orientation has always favored demand-side stimulus rather than supply-side reform or fiscal balance. Critics argue that public subsidies and social transfer payments are no longer a sustainable answer for an increasingly gig-economy-driven younger generation.

At the same time, even though unemployment fell to a near record low of 5.4% during his third term and economic growth repeatedly exceeded economist forecasts, inflation-driven living costs have pushed Lula’s approval to a historical low this term, with many citizens still not feeling any tangible benefits from economic improvements.

Politically, Brazilian society is deeply divided along irreconcilable ideological lines. Analyst Creomar de Souza stated:

“He may think he has won himself a pass, but he secured re-election in a fragile institutional environment. He needs to build a broad governing coalition—even as his victory sends a strong signal to the far right, forcing them to rethink their approach.”

Creomar de Souza pointed out that Lula must rebuild his governing coalition amid intense political polarization and at the same time issue clear signals to the radical right—both tasks come with inherent tension.

Lula also faces the challenge of having no clear successor, and previously publicly stated he would not run, only to change his mind. His age also continues to draw public attention.

Lula concluded his second term in 2010 with an 83% approval rating, which earned him praise from Obama as “the most popular politician on Earth.” However, corruption scandals and time in prison have since tarnished his halo, bringing his political career to the brink of collapse.

Now, after two remarkable political comebacks, Lula steps onto a new starting line at the age of 80.