Key Highlights

● XP soared as investors piled into Brazilian stocks after Sunday's presidential election first round.

● Brazil's Ibovespa index rocketed to a record 206,911.89, its biggest one-day rise since March 2020.

● US-listed Brazilian financial names Itaú Unibanco, Banco Bradesco, Nu Holdings, StoneCo and PagSeguro all surged.

XP soared on Monday, Oct. 5, as Brazil's first-round presidential vote sparked a ferocious rally in Brazilian assets, with the broker leading a charge in US-listed shares.

Brazil goes risk-on

XP (NASDAQ:XP) soared on the Nasdaq Composite on Monday, though reports differed on exactly how far. Every major account showed a huge gain as investors piled into Brazilian stocks after Sunday's presidential election.

Right-wing Senator Flávio Bolsonaro edged ahead of President Lula in the first round, forcing a runoff on Oct. 25. Investors bet that a Bolsonaro government could bring tighter spending and economic reform.

XP is one of Brazil's largest Investment Brokers and financial platforms. When Brazilian markets rally, more trading and investing activity can flow through its business, which helps explain why it was among the biggest winners.

Ahead of the open, Ivo Chermont, chief economist at Quantitas, predicted: "Investors will wake up on Monday to a very powerful rally across asset classes."

Thierry Larose, portfolio manager at Vontobel, said: "We expect a strong rally across Brazilian assets."

Pedro Galdi of AGF Investments said: "The market wants change, it wants reform, it doesn't want a high public deficit."

Capital Economics said the result raised "better prospects of fiscal tightening and reform."

A record in São Paulo

At home, the Ibovespa rocketed to a record 206,911.89, its first close above 200,000 and its biggest one-day rise since March 2020. The Brazilian real strengthened to about 5.00 per dollar.

US-listed Brazilian shares surged across the board. Itaú Unibanco (NYSE:ITUB), Banco Bradesco (NYSE:BBD), Nu Holdings (NYSE:NU), StoneCo (NASDAQ:STNE), PagSeguro (NYSE:PAGS) and Inter & Co (NASDAQ:INTR) all jumped. Petrobras (NYSE:PBR) climbed on hopes for a more market-friendly government, and MercadoLibre (NASDAQ:MELI) rallied. Exporters lagged because a stronger real makes their goods more expensive abroad.

The runoff risk

Monday's rally priced in a lot of hope. Prediction markets favor Bolsonaro in the runoff, but the result is far from settled. Bryan Harris, managing partner at Sabio, said: "The market will be looking for clear signals from Bolsonaro that he is serious about tackling the country's problems."

Records on Wall Street

The US market also had a strong day. The Nasdaq Composite jumped 286.45 points to a record 27,477.31, and the Nasdaq-100 closed at a record 31,076.44. The S&P 500 added 51.23 points to 7,773.95, just shy of its summer record. The Dow rose 90.94 points to 51,267.90.

Mega-cap AI names led, with Nvidia (NASDAQ:NVDA) hitting a record close. That came despite the 10-year Treasury Yield climbing to its highest level since 2002 after the ISM services prices-paid index hit 74.0, the highest since July 2022.

Friday's weak September jobs report, with payrolls up just 29,000, cut bets on an October Fed hike to roughly one in four or less.

Press coverage noted "voters are upset about high taxes and Lula's stewardship of the economy." Bolsonaro's PL party also became the largest bloc in Congress.

For XP, Monday's surge showed how tightly its fortunes are tied to Brazilian investor confidence, and how quickly sentiment can swing on political news.

What to watch

The Oct. 25 runoff between Bolsonaro and Lula is the main event for XP and other Brazilian stocks. Campaign promises on spending and reform, and any shift in polling, could move the shares sharply before then.

In the US, minutes from the Fed's September meeting are due Wednesday, Oct. 7 at 2 p.m. ET, and the Fed meets again Oct. 27 to 28. XP's next Quarterly Report will show whether the rally is translating into more client activity.