By Karin Strohecker
(Reuters) -A heavy election defeat for Argentine President Javier Milei’s ruling party in Buenos Aires province put the country’s strained markets on track to extend a recent selloff, raising uncertainty ahead of a key October vote.
The opposition Peronist party triumphed in Sunday’s legislative elections in the province, leaving the party of radical reformist Milei in a distant second place, the provisional official tally showed.
“The scale of the defeat far exceeded expectations,” said JPMorgan analyst Diego Pereira, adding that the resounding victory for the opposition in the regional contest signalled a steeper climb for Milei as he battles to deliver a positive outcome 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.”
Based on provisional official counts, the Peronists won 46.8% of the vote across the province, while the candidate of Milei’s party took 33.8%, with 82.2% 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 pressure in recent weeks.
Political woes, especially corruption allegations involving Milei’s sister Karina Milei, and economic pressures that saw government and consumer confidence indicators drop sharply recently, cast a long shadow over markets.
MARKET SELLOFF
Argentina’s main equity index has 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.
On Monday, U.S.-listed shares of Argentine companies suffered steep falls in premarket trading, with major companies such as state oil firm YPF and Grupo Financiero Galicia seeing losses in the double digits.
Argentina’s debt was also poised for more pain, with investors saying early market indications were pointing to 5- to 6-point falls in the country’s international bonds.
“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.
Analysts predicted the currency will be vulnerable to more weakness which in turn would pressure FX reserves.
“(Economy Minister Luis) Caputo said yesterday that the FX regime won’t change, so we’re likely to see strong pressure on the FX and declining reserves as the MoE intervenes,” said Ivan Stambulsky at Barclays.
“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.”
However, analysts said election dynamics elsewhere in the country would differ in October from Buenos Aires – a 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, additional reporting by Marc Jones and Shashwat Chauhan, editing by Sharon Singleton)
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