The following is a guest editorial courtesy of Carolane de Palmas, Markets Analyst at Retail FX and CFDs broker ActivTrades.

As we explained in Part 1 of Beyond Geopolitics, political risk in 2026 is no longer confined to flashpoints of geopolitical tension. Instead, elections themselves are emerging as a primary source of market volatility, reshaping expectations for fiscal policy, regulation and capital flows across both emerging and developed economies. In Part 2 of Beyond Geopolitics, the focus shifts to Brazil’s high-stakes general election and the U.S. midterm elections.

Brazil’s Defining Choice: Fiscal Continuity or Market-Driven Reform

Brazil will head to the polls in October 2026 for general elections and investors are facing one of the most consequential political tests in emerging markets. As Latin America’s largest economy, Brazil plays an outsized role in regional capital flows, commodity markets and investor sentiment toward the broader asset class. The upcoming vote is therefore not just a domestic political event, but a potential catalyst for significant market repricing. At its core, the election presents a clear but highly uncertain choice between political continuity and a possible shift toward a more market-oriented policy framework.

Brazilians will vote on October 4 to elect the president, members of congress, state governors and regional legislatures. Given the country’s fragmented political system, a second-round runoff on October 25 is widely expected for the presidential race. This extended electoral process means markets may face several months of heightened volatility, with shifting alliances and polling trends influencing expectations right up to the final vote.

The political backdrop is unusually complex. Former president Jair Bolsonaro has been sentenced to a lengthy prison term, effectively removing him from the race and leaving the right deeply divided. The debate over a possible amnesty has further complicated coalition building, creating uncertainty over whether a unified opposition candidate can emerge. This fragmentation is a critical variable for investors, as it directly affects the likelihood of a competitive second-round contest.

At the center of the race stands Luiz Inácio Lula da Silva, who has confirmed he will seek an unprecedented fourth term at the age of 81. Lula remains one of the most recognizable and resilient figures in Brazilian politics, with a proven ability to mobilize voters and navigate complex coalitions. Early polls suggest he leads potential challengers, including members of the Bolsonaro family, but these figures remain fragile given the long campaign ahead and unresolved questions about opposition consolidation.

Lula’s age also introduces some uncertainty. Concerns about health and stamina are unavoidable and could quickly alter the electoral landscape if they intensify during the campaign. For markets, this creates difficulty in fully pricing either a continuation or a change in policy direction, increasing the risk of abrupt shifts in expectations depending on the evolution of voters’ preferences.

From an economic perspective, fiscal sustainability remains the central issue shaping investor views. Brazil’s debt burden has continued to rise, and repeated adjustments to fiscal rules have weakened confidence in the country’s budgetary framework. While strong revenues have provided temporary relief, markets remain wary that structural deficits will persist. High real interest rates reflect this skepticism, and recent stress in corporate credit has underscored the broader cost of fiscal uncertainty.

A Lula victory is therefore viewed through two competing lenses. Some analysts and investors fear that another term would mean prolonged fiscal slippage, higher debt and continued pressure on local assets. Others argue that Lula is a known quantity who has previously governed pragmatically, maintaining a somewhat macroeconomic stability while pursuing social objectives. This camp believes a fourth term could bring more orthodox economic management than current rhetoric suggests, particularly if Lula appoints a strong economic team.

The alternative scenario—a credible center-right candidate—represents the more market-friendly outcome. A shift toward fiscal discipline, structural reform and clearer policy signals could unlock significant upside in Brazilian assets. Analysts suggest such an outcome could support lower interest rates, tighter spreads and a stronger currency, alongside improved relations with the United States and renewed foreign investment. However, this scenario depends entirely on whether a divided opposition can coalesce behind a single, viable contender.

Brazil’s recent electoral history argues for caution in trying to anticipate what could happen. Unexpected events have repeatedly reshaped races late in the cycle, making early polling an unreliable guide. This history reinforces why investors should treat current assumptions as provisional rather than definitive.

In the months ahead, markets will closely monitor signs of opposition unity, Lula’s health and campaign momentum, as well as polling trends in potential runoff scenarios. After the vote, attention will shift rapidly to cabinet appointments and early policy signals, particularly around fiscal consolidation. The election represents a genuine inflection point for Brazil, with outcomes that could materially alter the risk-return profile of its markets and reverberate across emerging market portfolios in 2026.

United States Midterms: A Referendum on Power, Policy, and Post-Trump Politics

As global investors focus on leadership changes in emerging markets, the United States faces its own critical political test with the midterm elections scheduled for November 3, 2026. These elections will determine control of Congress during the second half of President Donald Trump’s second term and will strongly influence fiscal policy, regulation, and trade over the next two years. They also carry longer-term significance, acting as the first nationwide gauge of political momentum ahead of the 2028 presidential race, which will be the first in more than a decade without Trump himself on the ballot.

Midterms are a structural feature of the U.S. political system, designed to hold the executive branch accountable halfway through a presidential term. All 435 seats in the House of Representatives will be contested, along with roughly one-third of the Senate. Historically, the president’s party tends to lose seats during midterms, and that pattern looms large over this cycle given narrow margins in both chambers. Even small seat shifts could materially change the balance of power in Washington.

In the House, Democrats need only a modest net gain to reclaim control, making the chamber highly competitive. Redistricting has reduced the number of truly swing districts, but it has also tightened margins, meaning outcomes in a limited number of races could decide the majority. In the Senate, the challenge is steeper for Democrats, who would need several gains in a difficult electoral map. Control of the Senate matters disproportionately for markets because it determines confirmation of judges, senior officials, and central figures in economic policy.

Beyond Congress, voters will elect 36 governors as well as attorneys general and secretaries of state. These races have taken on added importance because they shape state-level economic policy and play a role in election administration. Several of these contests will take place in states likely to be decisive in the 2028 presidential election, making the midterms an early indicator of future political alignment.

For investors, economic policy is the central lens through which the midterms are viewed. Affordability has emerged as the dominant campaign theme, reflecting persistent voter concerns over housing costs, healthcare expenses, and consumer debt. In response, the administration has promoted measures aimed at lowering mortgage costs, limiting credit card interest rates, and reducing prescription drug prices. While these initiatives may resonate politically, they introduce uncertainty for specific sectors, including financials, pharmaceuticals, and parts of the housing market.

Financial institutions could face margin pressure if consumer lending rates are capped, while pharmaceutical companies remain sensitive to any expansion of drug pricing controls. Housing-related policies could create mixed outcomes, supporting demand in some segments while weighing on others depending on regulatory details. As a result, sector-level volatility is likely to increase as election outcomes clarify the likelihood of these proposals becoming law.

Trump’s approval ratings are another key variable. Historically, weak approval has translated into midterm losses for the president’s party, and this pattern is shaping expectations for 2026. Democrats are framing the election as a referendum on Trump’s leadership and policy direction, while Republicans are seeking to mobilize their base and limit losses among independents. The resulting tension increases the probability of a divided Congress, which markets often interpret as a constraint on major policy shifts.

A divided outcome would likely lead to legislative gridlock, limiting the scope for sweeping fiscal or regulatory changes. While this can frustrate policymakers, markets sometimes view gridlock as stabilizing, particularly in periods of elevated uncertainty. By contrast, unified control would raise the probability of more aggressive policy action, whether through further tax changes, deregulation, or intensified oversight.

The 2026 midterms also matter because they offer a first glimpse of U.S. politics beyond Trump. With the president constitutionally barred from seeking another term, the results will shape internal debates about the future direction of both parties. Strong Republican performance would suggest continued voter support for Trump-aligned policies, while significant losses could accelerate efforts to redefine the party ahead of 2028.

From the first primaries in March, markets are likely to react to polling trends, early voting data, and high-profile races that could tip congressional control. Volatility may persist after election day as results are finalized and policy implications become clearer. For global investors, the U.S. midterms represent a key event in 2026, with consequences for fiscal policy, regulation, and international economic relations that extend well beyond American borders.

Sources: Reuters, French Institute of International Relations, BBC, CNN, Morgan Stanley

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