Traders are bracing for steep losses across Brazilian markets Monday after President Luiz Inácio Lula da Silva pulled off a stunning comeback to defeat Flávio Bolsonaro, the right-wing candidate that many investors preferred.

Early indications pointed to a major rout: An ETF tracking Brazilian equities tumbled as much as 16% in Japan, the most intraday since 2020, and a currency derivatives contract on the CME exchange showed the real at 5.55 per dollar. While not a direct indication of pricing, the move implies a more than 10% plunge in the real from the close on Friday.

Trading-desks across Sao Paulo said they expect the selling to be so intense Monday morning, and the declines so severe, that circuit breakers may be triggered.

Brokerage firm Monte Bravo had estimated the benchmark Ibovespa stock index could tumble 11% in the first hour of trading if Lula won. In a Citigroup Inc. survey of 73 investors published Friday, most expected that outcome to send the currency down at least 5%, with swap rates rising more than 1 percentage point as traders scrap the bets on interest-rate cuts that they had piled into after Bolsonaro surged past Lula in the first-round vote earlier this month.

“It’s going to be a tough day. The market will reprice everything,” said Bruno Funchal, CEO of Bradesco Asset Management, which manages 1.1 trillion reais ($221 billion) in assets. “Everyone was caught by surprise. Everyone is trying to understand what happened.”Lula, who markets see as unlikely to push for the fiscal austerity that Brazil needs in order to lower interest rates, won 51.8% of the runoff vote. Bolsonaro got 48.2%, according to Brazil’s electoral court, with nearly all ballots counted.

Investors had largely positioned for a Bolsonaro victory after his surprise lead in the first-round vote earlier this month triggered a major rally, drawing in billions of foreign flows on hopes of a much-demanded fiscal tightening that would allow for lower interest rates ahead. Firms like UBS Global Wealth Management, Morgan Stanley, JPMorgan Chase & Co, and Citigroup Inc. rushed to put out bullish calls for Brazilian assets.

As polls continued to point to a tight runoff as Lula rolled out a string of voter-friendly measures, many started ramping up hedges in order to protect their portfolios. But a Bolsonaro win was still largely seen as the base-case.

“Markets weren’t positioned for this. What we’re seeing in Tokyo is the election trade unwinding: the post-first-round rally is being handed back almost in one move,” said Anna Wu, an investment strategist and founder of Floodlines Research. “It’s more than a knee-jerk in my view, as the local market now face real risk of government debt and currency weakness.”A circuit breaker is triggered when the Ibovespa stock index falls 10% or more, halting trading for 30 minutes. If losses deepen to 15% after activity resumes, the market is suspended for another hour, while a 20% decline allows exchange operator B3 to determine how long trading should remain halted.

The country’s derivatives markets — some of the most liquid assets in Latin America — do not have circuit breakers, but are subject to trading limits that restrict price moves. For swap rates, there is a 90-basis-point trading band in either direction, while currency futures can move 6% up or down. In each case, once that limit is reached, trading is virtually stopped and the exchange needs to authorize a wider band.

The last time Brazilian stocks triggered a circuit breaker was in early 2020, when the pandemic was roiling global markets.

Since returning to office in January 2023, Lula, an 80-year-old leftist, has sought to improve the lives of working Brazilians by boosting consumption and building on a credit expansion that took off during the pandemic. But he’s done little to address the country’s soaring deficits, which investors say are the reason the nation has some of the highest real rates in the world.

Brazil’s fiscal problems run deep, and the strain is showing across the economy. Household delinquencies are at a record, millions of companies are behind on payments and farmers are defaulting at an unprecedented pace. The government itself has little room to maneuver, with public debt above 80% of GDP and a budget that is largely tied up in mandatory spending.

Doubts about Lula’s commitment to reining in the fiscal deficit came to a head in late 2024. A selloff sent the real to a record low and engulfed everything from stocks to local-currency debt and dollar bonds.

Still, Brazilian markets have followed a rocky but ultimately positive path in his third term in office. High rates, while restrictive for the economy, make the currency appealing to carry traders amid a weaker dollar and a push away from US markets that has helped lift emerging markets more broadly.

For now, investors are bracing for what Homin Lee, a strategist at Lombard Odier in Singapore, called an “unavoidable” reversal of the Bolsonaro rally.

Wells Fargo strategist Alvaro Vivanco wrote ahead of Sunday’s runoff that in case of a surprise Lula win, he expected the currency to weaken to 5.30 per dollar once markets reopen Monday. Guilherme Abbud, CEO at Persevera Asset Management, said the currency could weaken by 7%, and a circuit breaker in the stock market is “possible.”

“It could be somewhat worse because moves to the downside tend to involve more panic and emotionally driven stop-losses,” Abbud said. “At least initially, the prospect of a major shift in economic policy would disappear. Lula could eventually pursue a more cautious approach to spending, but the market is unlikely to give him the benefit of the doubt.”With a Lula win, “everyone is expected to step back,” said Cathy Hepworth, who heads the emerging-markets debt team at $1.5 trillion asset manager PGIM.

“It’s going to be a much more meaningful repricing, perhaps for a bit, given how much rates have rallied,” she said ahead of the vote. “But it’s still Brazil, and Lula is a political animal, so things will ultimately stabilize.”