Traders pounced on Argentine assets for a second day Thursday, sending bonds into distressed territory and the peso to a fresh low.
The moves stand out in what’s been a bad few days for emerging markets. All developing-nation currencies are down this week as the US dollar strengthened, and MSCI’s gauge of stocks is set for its first weekly loss since February. Even so, Argentina is far ahead of the pack.
Investors are reassessing the odds President Mauricio Macri can be re-elected in October as the market-friendly leader struggles with soaring inflation and a recession. Polls show the race is too close to call, with Macri’s leftist predecessor, Cristina Fernández de Kirchner, whose years in power were marked by import restrictions and currency controls, likely to stage a surprising comeback.
Here’s what strategists and are saying about the rout:
Tania Escobedo Jacob, a strategist at RBC Capital Markets in New York:
- Recommends shorting the peso.
- “Price controls have been ineffective in the past and Macri has previously criticised policies of market intervention.”
- Latest measures to contain inflation "could be taken as a sign of panic as Macri’s popularity falls in the polls and Fernández de Kirchner capitalises on the deterioration in economic prospects.”
- “Preserving financial stability and containing inflation without inflicting more pain to a contracting economy is a necessary condition for Macri to maintain his chances of re-election; it does not look good for him.”
- “Political continuity is still the scenario that most investors are discounting and I think that this week some might be reassessing that view.”
Roger Horn, senior EM strategist at SMBC Nikko Securities America in New York:
- Commenting on Wednesday’s plunge, said “on almost everything there were mostly only sellers. That said, there was some buying interest but at really low levels which sellers were not (yet?) willing to accept.”
- “We spent a lot of the day chatting with investors and asking each other why – ‘capitulation, no local buyers and everybody is long’ was the best we could come up with”
JPMorgan economists Diego Pereira and Lucila Barbeito:
- Support for Argentina’s Mauricio Macri is eroding as pressure on credit premium and exchange rate "reverberates into higher expected inflation."
- “Negative feedback loop” and inflation YTD performance are the main drivers behind “Argentina’s dire situation.”
- “The market seems to be looking for a circuit breaker.”
- Argentina government’s political strategy “seems inconsistent with the necessary conditions to remain in office.”
- The incumbent facing the populism in a run off appears to be the “dominant strategy,” but political risk on populism return weighs on financial variables.
- JPMorgan raises doubts on the central bank attempt to use the FX band ceiling as a nominal anchor due to lack of intervention power in the spot market.
- FX ceiling is 15% distant higher, could maximize FX pass-through to inflation.
Citigroup analysts led by Dirk Willer, the head of EM fixed income strategy:
- “Certain credible polls show Fernández de Kirchner with a lead against Macri among undecided voters. Isonomia last week showed Fernández de Kirchner at 45 percent vs. Macri at 36 percent. Other less reliable polls note a similar development, which seem to have spooked markets further.”
- “A weaker FX and sticky inflation will continue to undermine Macri’s candidacy.”
- “Markets see the outcome of the elections as binary, with a return of the old administration potentially amounting to an eventual default.”
- “Assuming a 35% recovery value, the two-year CDS the market is now pricing a likelihood of Fernández de Kirchner winning around 40 percent (depending on assumptions of the likelihood of Macri vs a moderate Peronist winning). This can rise to 50 percent in our mind.”
- “We continue to think that the earliest point to consider Argentina from the long side is early August, in case the market overshoots on the Fernández de Kirchner likelihood of winning. We don’t think that this is the case yet.”
Alberto Bernal, chief EM and global strategist at XP Investments in New York:
- "Regardless of the recent performance of asset prices, we maintain our longstanding view. Policy continuity will most likely remain in place, and Argentina will NOT default on its debt ex-post the presidential election"
— With assistance by Jorgelina Do Rosario