Why Is Financial Services Firm XP Stock Plummeting on Monday?

What happened

XP Inc. shares are plunging on Monday following the Brazil elections after President Luiz Inácio Lula da Silva secured victory, defeating Sen. Flávio Bolsonaro and overturning investor expectations of a rightward political shift following the first round three weeks ago.

Confirmed

Global impact / market context

XP is a Brazilian financial services firm, so its stock tracks sentiment toward Brazil. Lula's win reduced hopes for business-friendly reforms and tighter public finances, which can raise worries about borrowing costs, meaning the cost of money, and pressure company profits and stock values.

Analyst inference

Brazilian assets reversed a strong rally built on hopes of a Bolsonaro win. The Ibovespa index had climbed 12% over the past month, and the real strengthened nearly 5% against the U.S. dollar. Rate futures had reflected expectations of tighter public finances and lower borrowing costs.

Analyst inference

What to watch

1. The Tokyo-listed Nomura NF Ibovespa Link ETF, which tracks Brazilian equities, plunged as much as 16% in Japan. November futures for the Brazilian real fell roughly 10% during Asian trading hours, according to the Economic Times. Confirmed
2. Watch whether Brazilian officials propose spending plans or reforms that reassure investors about public finances, since hopes for tighter fiscal policy helped drive the recent rally in Brazilian stocks and the currency. Proposed
3. Watch XP's share price reaction against Brazilian bank peers and the real, because the election result affects the country's outlook. Weak currency and higher expected borrowing costs can pressure financial firms' profits. Analyst inference

Evidence

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