Argentina braces for market turbulence as midterm elections loom

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By Rodrigo Campos, Karin Strohecker and Marc Jones

NEW YORK/LONDON (Reuters) -Investors are bracing for a renewed round of Argentine currency and bond market swings, as this Sunday’s midterm elections mark a defining moment for President Javier Milei’s economic reform efforts.

Milei is not on the ballot himself but his La Libertad Avanza party is, making the vote a key test for his right-wing stabilization strategy and far-reaching austerity plan, which endeared him to U.S. President Donald Trump and helped to secure a $20 billion U.S. swap line.

Even so, it’s been far from a smooth ride in the markets in recent weeks, and with most polls showing a tight race, investors see the potential for gyrations either way once the election results are in.

The peso stumbled to a record low against the dollar this week and investors expect further weakness ahead. Argentina’s heavily traded international bonds, star performers across emerging markets last year, have sunk into losses in 2025.

As investors look ahead to Sunday’s election, Trump has added to the pressure by threatening that he won’t waste more time on Argentina if Milei loses. 

“It just demonstrates the transactional nature of the relationship with the United States these days,” said Carl Ross, partner and sovereign credit analyst at asset manager GMO, which is overweight Argentina’s international dollar bonds. “It makes it more difficult to play it, because it becomes even more of a key-man risk, and it becomes even more binary of an outcome.”

MILEI WIN COULD TRIGGER RALLY 

In the midterm vote, half of Argentina’s lower Chamber of Deputies as well as a third of the Senate are up for grabs. Milei’s party will need about one-third of the votes in each house to thwart future attempts to override his spending vetoes.

The election math is complex, though anything in the region of 35% or above is seen as a success for Milei, using as a barometer the 30% he secured in the first round of the 2023 presidential election.

“If Milei doesn’t perform well, I think we get a (market) correction because my view is that this U.S. mini-bailout will not be available in such size,” said Diliana Deltcheva, head of emerging market debt at Robeco, who calls the election a coin toss.

“I can see another three to five points of upside (in bonds) if Milei does well, but the market has already rallied back to the highs of the year so the downside is pretty large,” she said, adding that the firm could add to its current market-weight holdings if bonds sold off.

Local brokerage Max Capital said sovereign dollar bonds are pricing a win from left-leaning opposition Peronists by about 4 percentage points in Sunday’s vote. A better result than that for Milei’s party could see upside of about 15% in the bonds, they said.

Aside from the U.S. swap line, the Trump administration is negotiating with U.S. banks the formation of a $20 billion fund to purchase Argentine sovereign debt, U.S. officials have said.

U.S. SUPPORT IS CONDITIONAL

But with U.S. support conditional on a continuation of Milei’s previous policies, his party’s election results will be closely scrutinized.

JPMorgan’s baseline sees Milei’s bloc on track to secure enough seats to protect his veto power but warned that such a result alone would not deliver reforms or bring down risk premiums.

“In this scenario U.S. support is poised to intensify, providing a tailwind for the administration. Political risk premium, which has weighed heavily on markets, would likely recede,” JPMorgan analysts said.

Any ballot underperformance by Milei’s party could also be seen as an early gauge of his longer-term political standing, including his prospects for retaining power in the 2027 general election, said Alejo Czerwonko, CIO for emerging markets in the Americas at UBS Global Wealth Management. 

“Beyond the election, a sustained rally will require a credible strategy to rebuild international reserves, likely involving a significant devaluation,” Czerwonko said.

(Reporting by Rodrigo Campos in New York and Karin Strohecker and Marc Jones in London; Editing by Christian Plumb and Edmund Klamann)