Morgan Stanley has withdrawn advice to invest in Argentina. Election results brought down the market

Morgan Stanley refused to recommend buying Argentine assets after the defeat of the party of the country's president Javier Miley in the elections in the province of Buenos Aires. The defeat entailed the collapse of the Argentine currency, bonds and shares of Argentina. Investors took the election results as a signal of weakening of his political positions and doubt whether his government will be able to carry out economic reforms and keep the peso exchange rate despite currency interventions.

Morgan Stanley has closed the recommendation "buy" Argentine assets, which it gave just last week, reports Bloomberg. The bank recognized that the ongoing uncertainty in the market forces them to take a wait-and-see stance, even though Argentine assets now look more attractive in price, the publication adds. In addition, the bank's economist Fernando Sedano and strategist Simon Weaver withdrew their recent positive recommendation on the country's dollar bonds.

The reversal of the advice to buy Argentine assets followed a collapse in the local currency and stock market. On Monday, Argentine dollar bonds were the worst performers among emerging markets, with the price of securities maturing in 2035 falling from 61.3 cents to 56 cents for every dollar of face value and their yields jumping to nearly 13%.

The official exchange rate of the national currency continued to fall on Tuesday, September 9. It reached 1,425 pesos per US dollar, more than 3% higher than Friday's rate (before the market turmoil). This is also close to the upper limit of the Central Bank's "non-interventionist" range of 1,475 pesos on Monday.

The benchmark stock index Merval at the end of trading on September 8 in Buenos Aires collapsed by more than 13%. This was its largest intraday decline since 2020, Bloomberg notes. Shares of U.S.-traded Argentine companies, including Banco Macro SA, Grupo Financiero Galicia and Pampa Energia SA, collapsed at least 15% each.

President Javier Milay's party suffered a major electoral defeat in Buenos Aires province, where nearly 40% of the country's voters are concentrated. The main opposition, the Peronists, beat Miley's party by nearly 14 percentage points when 99% of ballots were counted. In a brief statement, the president acknowledged mistakes but pledged to continue to pursue austerity and free-market policies that have previously helped bring down inflation in a country with chronic crises. "We have failed electorally and we have to accept that," he said.

The province of Buenos Aires is traditionally considered a bastion of Peronism. The chances of victory for Miley's allies there were initially small, but it was this result that investors perceived as an indicator of political sentiment on the eve of the national midterm elections scheduled for October 26, Bloomberg notes. In October, the country will renew about half of the lower house of Congress (Chamber of Deputies) and part of the Senate.

The defeat of the president's party has increased doubts that his government has enough political support to continue economic reforms, Bloomberg notes. In addition, Mealey has been dealing with the fallout from a corruption scandal involving his sister Karina, adding to concerns about his standing among voters. His government has denied any wrongdoing. The president's future will now likely depend on how he adjusts course between now and the midterm elections in October, Bloomberg emphasizes.

"The magnitude of the defeat far exceeded expectations," JPMorgan analysts Diego Pereira and Lucila Barbeito noted in a Bloomberg statement. - With nearly 50 days until national midterm elections, the peso remains vulnerable to further depreciation despite the Treasury's intervention in the foreign exchange market."

"They are willing to spend dollars to avoid a currency crisis, and that's what I expect them to do in the coming days," added Carolina Schuartzman, director of sales and trading at private bank Banco de Valores. - But we need to watch the dynamics and how long this can last, because too much loss of dollars to defend the exchange rate will inflate the risk of investing in the country."

Sunday's defeat raises the chances of "a negative scenario in which the market questions the likelihood of continued reforms and uncertainty around future sources of external financing increases," according to Morgan Stanley economist Fernando Sedano and strategist Simon Weaver.

"The landslide defeat of President Javier Miley's party in Buenos Aires provincial elections is likely to confirm the market's worst fears and trigger a negative feedback loop: falling prices, nasty policy moves and gloomier expectations ahead of national midterm elections in October," Jimena Zuniga, a Latin America geoeconomics analyst, said in a Bloomberg note.

This article was AI-translated and verified by a human editor