Under pressure Argentine markets brace for key Milei midterm test

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By Marc Jones and Rodrigo Campos

LONDON (Reuters) -Some of the world’s top investment banks are backing Argentina’s markets to bounce if fiery leader Javier Milei comes through key election tests which begin this weekend without too much damage, but suffer if he doesn’t.

The rally fostered by Milei’s chainsaw-style reforms has taken a significant hit in recent weeks as a mix of political pressure, scandal and currency worries has put investors on edge.

The main stock market fell over 14% last month, the most since February 2024, while international government bonds have sold off and an accelerating slump in the now-unpegged peso saw the treasury u-turn this week and start intervening in the FX market. 

The focus for Sunday’s Province of Buenos Aires (PBA) election is on how much of the vote goes to the opposition Peronists — the big-state movement Milei swept out of power in 2023 on a platform to resuscitate the economy and quash corruption.

Recent weeks though have been dominated by a scandal involving Milei’s sister and gatekeeper, Karina Milei, after recordings emerged of what appeared to be a senior government official suggesting she was getting kickback payments.

The president has dismissed the allegations as lies. But his popularity ratings have taken a hit and were dealt a further blow on Thursday as Argentina’s Congress struck down his veto of a bill increasing disability benefit spending.    

The peso is down 6% since the scandal broke while bond yields, which move inversely to prices, have risen to nearly 13% – well above the sub-10% level the government would realistically need to regain access to international capital markets.

Still, it is unclear how much real effect the turmoil will have on the election. Many of Milei’s supporters have shrugged off the allegations and some of Wall Street’s top banks are now urging clients to buy up beaten-up bonds and stocks.

“Assuming Milei avoids a disastrous outcome that threatens governability in the remainder of his term, Argentina has significant value,” JPMorgan said in a note on Thursday which maintained its ‘overweight’ recommendation on the bonds.

GAME THEORY

Morgan Stanley and Citi have issued similar calls too, with the former sticking to its view that yields will be under the crucial 10% threshold by the end of the year.

“We see attractive valuations in both sovereign credit and equities and recommend investors add into the recent weakness,” Morgan Stanley analysts said.

The other scenario though is that Milei takes a drubbing.

Morgan Stanley warns the bonds could drop another 10 points if he does, compared to an 11 point rise by year-end if his position and radical reforms hold.

Geronimo Mansutti at research firm Tellimer highlights that PBA, where nearly 40% of Argentines live, is the main Peronist political stronghold and one of the few parts of the country Milei didn’t win in 2023.

“A slim Peronist victory, by less than 5%, would be a good outcome for the government given the circumstances,” Mansutti said referring to Sunday’s PBA vote, which comes ahead of national midterm elections on October 26. 

“What ultimately matters is whether Javier Milei or another pro-markets politician gets elected president in 2027,” added Emerging Markets Insights analyst Metodi Tzanov. 

“There is a game theory problem here” though, he added. “Because the market getting scared today about the Peronists winning in 2027 can create a self-fulfilling prophecy through negative (market) dynamics.”

(Reporting by Marc Jones; Additional reporting by Rodrigo Campos; Editing by Andrea Ricci)