Argentina markets tumble after Milei’s defeat in Buenos Aires vote

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By Karin Strohecker and Rodrigo Campos

LONDON/NEW YORK (Reuters) – Argentina’s markets tumbled on Monday after a heavy defeat for President Javier Milei’s party at the hands of the Peronist opposition at local elections stoked worries about the government’s ability to implement its economic reform agenda.

The peso slumped almost 6% against the dollar as local markets opened while the benchmark stock index fell 13%, and an index of Argentine stocks traded on US exchanges lost nearly 18%.

Some of the country’s international bonds also saw their biggest falls since they began trading in 2020 after a $65 billion restructuring deal under former President Alberto Fernandez.

“We had our reservations about the market being too complacent regarding the Buenos Aires election results. The foreign exchange market will undoubtedly be under the spotlight, as any instability there can have a ripple effect on Argentine assets,” said Shamaila Khan, Head of Fixed Income Emerging Markets and Asia Pacific at UBS in response to emailed questions.

“However, it’s important to note that simply using reserves to prop up the currency isn’t likely to provide much reassurance to the market. The midterm elections, in my opinion, carry more weight and its outcome will significantly influence how Argentine assets perform in the coming months.”     

The 13-point gap in the Buenos Aires Province (PBA) election in favor of the opposition Peronists was much wider than polls anticipated and what the market had priced in. The government setback at the polls adds to recent headwinds for a market that had until recently outperformed its Latin American peers.

The bond market selloff saw the country’s 2035 issue fall 6.1 cents, on track for its largest daily drop since their post restructuring issuance in 2020.

“The scale of the defeat far exceeded expectations,” said JPMorgan analyst Diego Pereira in a note, adding the resounding victory for the Peronists signalled a tough battle for Milei in national midterm elections on October 26. 

“With five weeks until the national vote, the administration may recalibrate its political strategy to address missteps observed in recent months,” JP Morgan said.    

Based on official counts, the Peronists won 47.3% of the vote across the province, while the candidate of Milei’s party took 33.7%, with 99.98% of the votes counted.

Argentina – one of the big reform stories across emerging markets since Milei became president in December 2023 – has seen its markets come under heavy pressure over the last month following a corruption scandal involving Milei’s sister and political gatekeeper Karina Milei.

MARKET SELLOFF

Argentina’s main equity index had dropped around 20% since the scandal broke, its international government bonds have sold off and pressure on the recently unpegged peso forced authorities to start intervening in the FX market.

“The result was much worse than the market expected – Milei took quite a big beating so now he has to come up with something,” said Viktor Szabo, portfolio manager at Aberdeen Investments.  

Morgan Stanley had warned in the run up to the vote that the international bonds could fall up to 10 points if a Milei drubbing dented his agenda for radical reform. On Monday, the outcome saw the bank pulled its ‘like’ stance on the bonds.

Barclays analyst Ivan Stambulsky pointed to comments from Economy Minister Luis Caputo on Sunday that the country’s FX regime won’t change.

“We’re likely to see strong pressure on the FX and declining reserves as the Ministry of Economy intervenes,” Stambulsky said. And “If FX sales persist, markets will likely start wondering what will happen if the economic team is forced to let the currency depreciate before the October mid-terms.”

Some analysts however predicted other parts of the country were unlikely to vote as strongly against Milei as in Buenos Aires province given its a traditional Peronist stronghold. 

They also expected the Milei government to stick to its programme of fiscal discipline despite economic woes.

“The PBA election took place amid a significant tightening of domestic financial conditions, a depreciation of the peso, expectations of a slight uptick in August inflation, a deceleration in economic growth,” said Goldman Sachs analyst Sergio Armella. 

“The provincial election stands to have a very limited effect on the policy mix of the Milei administration, it does represent a political setback for the government.”

(Reporting by Karin Strohecker and Rodrigo Campos, additional reporting by Marc Jones and Shashwat Chauhan, editing by Sharon Singleton and Alistair Bell)