By Oliver Griffin, Marcela Ayres and Gabriel Araujo
SAO PAULO/BRASILIA, Oct 5 (Reuters) - Brazilian assets rallied on Monday after right-wing Senator Flavio Bolsonaro outperformed opinion polls to finish first in the first round of Sunday's presidential election, with the Bovespa benchmark stock index gaining more than 9% and the country's currency strengthening against the US dollar.
The eldest son of former President Jair Bolsonaro won 47% of the votes cast and will face leftist incumbent President Luiz
Inacio Lula da Silva, who secured about 45%, in a runoff on October 25. Polls had forecast Lula would lead the first round of voting by around three percentage points.
Investors cheered on Monday morning as Bolsonaro's strong showing was matched by gains for his allies in Congress. Analysts say a friendlier legislature would make it easier for him, if elected, to push through a pro-market agenda of tighter public spending, privatizations and tax cuts.
"Brazil wants change," Flavio Bolsonaro said on Sunday evening, heralding the "end of the era of (Lula's) Workers' Party."
Shares in retailer Magazine Luiza, stock exchange operator B3, lender BTG Pactual, homebuilder Cyrela and conglomerate Cosan jumped more than 20% each, putting them among the top gainers.
Pulpmaker Suzano, on the other hand, fell as much as 8.5%.
Brazil's real currency strengthened more than 4% against the US dollar in early trading, moving below 5.00 per greenback, from around 5.22 previously, in line with analyst forecasts and with the currency's performance four years ago when then-President Jair Bolsonaro did better than expected in the first-round vote against Lula.
Jair Bolsonaro went on to lose to Lula in the second round of that election and was subsequently convicted of trying to carry out a coup to overturn the result. The former president was sentenced to about 27 years in prison and is currently under house arrest.
Brazil's international debt also rallied on Monday, while broader fixed-income markets were jittery. The 2056 bond was up 1.4 cents on the dollar to bid at 93.5 cents, Tradeweb data showed.
'THE MARKET WANTS CHANGE'
Flavio Bolsonaro has pitched himself as a "more centered" version of his father to investors concerned about Brazil's burgeoning fiscal pressures.
"It remains to be seen whether the senator would ultimately prove more fiscally responsible than Lula would be in a fourth non-consecutive presidential term. However, markets are likely to give him the benefit of the doubt," said Thierry Larose, portfolio manager at Vontobel.
Analysts also expect the real to continue strengthening into 2027. Societe Generale forecast that it will firm to 5.10 by end-2026, with scope to move below 5.00 in the first half of 2027. Morgan Stanley forecast the real could strengthen past 4.90 and toward 4.50 in the first quarter of next year.
"The market wants change, it wants reform; it doesn't want a high public deficit; with the current government, all of this will continue," said Pedro Galdi, investment analyst at the AGF Investments platform.
Bolsonaro's strong showing is likely to boost market confidence in the near term, said Bryan Harris, a managing partner at Sabio.
"The market will be looking for clear signals from Bolsonaro that he is serious about tackling the country's problems," Harris said.
Heading into Sunday's vote, most private polls, which largely underestimated Flavio Bolsonaro's strength, had shown the 45-year-old senator and Lula, who will turn 81 later this month, about even in a runoff vote.
Addressing a crowd at a hotel in Sao Paulo, Lula said he had been convinced he would win the election in the first round.
"Starting tomorrow, we begin a new campaign," he said, promising to show voters what he had accomplished as president.
(Reporting by Oliver Griffin and Luciana Magalhaes in Sao Paulo and Marcela Ayres in Brasilia; Additional reporting by Libby George and Marc Jones in London and Gabriel Araujo in Sao Paulo; Writing by Oliver Griffin and Karin Strohecker; Editing by Alexander Smith, Chizu Nomiyama and Paul Simao)
