EMERGING MARKETS-Brazilian assets lead LatAm advances after Bolsonaro surprise

By Johann M Cherian

Oct 5 (Reuters) - Latin American markets advanced on Monday, with Brazilian assets leading the surge after right-wing senator Flavio Bolsonaro outperformed private poll predictions and took the lead in the first round of presidential elections over the weekend.

Market expectations are that Bolsonaro would adopt more market-friendly policies along with fiscal restraint in a country where interest rates are at 13.75% due to inflation induced by increased public spending.

"Bolsonaro must now demonstrate that market expectations of stronger primary balances and fiscal reform are supported by credible proposals rather than campaign rhetoric," said Viktor Szabó, investment director, fixed income, at Aberdeen Investments.

Brazil's Bovespa index .BSVP jumped nearly 9% and hit a record high, with heavy-weights such as oil company Petrobras up 6% and lender BTG Pactual 18.8% higher.

The real rose more than 5% to around 5 per dollar, putting it on track for its biggest one-day gain in four years when President Jair Bolsonaro outperformed incumbent Luiz Inacio Lula da Silva during the first-round of 2022 elections.

Hard-currency bonds also surged with maturities in 2033 , 2036 and 2056 up over 1 cent each on the dollar.

Both candidates face a runoff on October 25.

"The promises and commitments made by both candidates over the next three weeks will therefore matter more than the headline political momentum," Szabó said.

More broadly, MSCI's index tracking regional equities .MILA00000PUS advanced 8.1%, putting it on track for its biggest daily jump since the pandemic. A parallel currencies gauge .MILA00000CUS rose 3.2% and was poised for its biggest one-day jump in over a decade.

The buoyant market mood was also driven by investors lowering their expectations of a Federal Reserve interest rate hike later this month following weaker-than-expected US data last week.

Mexico's peso firmed 0.3%, while local equities .MXX inched up 0.6%. Local interest rate expectations are likely to be a sharper focus later in the week when September inflation data is released.

Colombia's peso appreciated 1%. The energy exporter's finance ministry said it had carried out a 19.8 trillion peso ($6 billion) swap of local bonds, as part of a debt reprofiling plan aimed at easing near-term pressure on public finances.

Copper exporter Chile's peso rose 1.5% tracking higher prices of the red metal.

Bolivian hard-currency bonds maturing in 2028 were marginally higher after the International Monetary Fund's board approved a 36-month Extended Fund Facility arrangement for Bolivia worth about $1.9 billion, giving the country immediate access to about $214 million.

Key Latin American stock indexes and currencies at 1351 GMT: