Tuesday, August 13, 2019

Argentine peso slumps 30% in one day after surprise election result; yen and gold continue to surge

  • Dollar
  • Gold
  • Yen
  • Chinese Yuan

Market recap: Argentina’s president suffers massive defeat in primary elections

Argentina’s peso and its Merval Index plummeted on Monday after the country’s center-right leader, president Mauricio Macri, suffered a resounding defeat in the country’s primary elections on Sunday. The winner was his left-wing opponent, Alberto Fernández, who secured 47.7% of the vote, while Macri’s coalition gained only 32.1%.

As President Macri lost by a far greater margin than expected, there’s jitters from the market today, which is now expecting him to lose October’s general election as well, leading to a left-wing government. That will mean an end to the IMF’s funding loan to Argentina, which could result in another financial crisis.

The peso closed 15% weaker at 53.5 per dollar after plunging 30.3% to hit a new record low of 65 per dollar earlier in the day. Argentine stocks were among the top losers on the Nasdaq index, and the local Merval stock index closed 31% weaker.As Bloomberg reported, this is the second-biggest, one-day rout on any of the 94 stock exchanges tracked by Bloomberg since 1950. Refinitiv data also indicated that Argentine stocks, bonds and the peso have not recorded this kind of simultaneous decline since the South American country’s 2001 economic crisis and debt default.

Chart 1: USD/ARS 3 days chart (Source: Bloomberg)

Chart 2: Merval Index 1 month chart (Source: Bloomberg)

The widespread panic regarding the Argentina peso, stocks and bonds gives a clear signal of current market fears as left-wing leader Fernández has promised he will seek to rework Argentina’s $57 billion standby agreement with the IMF if he wins October’s presidential election. Even though the IMF declined to comment on the primary election result, it is clear the financial and political situation of Macri’s government will have a massive impact and could turn Argentina’s economy from one in recovery to one suffering a severe disaster.

Safe-haven assets such as the yen, bonds and gold rose sharply yesterday, with the yen rising to its highest level to near 105’s level for the first time in more than a year-and-a-half. Investors and top banks are projecting the US and China will not make a deal before the 2020 US presidential election. Stocks on Wall Street fell more than 1%, Chinese stocks rallied by more than 1% as the yuan was floated at around the 7-per-dollar level on Monday.

Sterling rose a little bit higher yesterday, as a fresh report indicated there are still credible routes for so-called Remainer MPs to explore if they wish to force Prime Minister Boris Johnson to seek an extension to the Brexit deadline.

Today’s analysis: Emerging markets crash may occur in Argentina; beware of the US’s CPI and the UK’s employment data

The scale of Alberto Fernandez’s win has proven his left-wing party will most likely secure a majority in the presidential election later this year. For Macri, the primary result has proven the public oppose his painful austerity measures and economic reforms, which have caused an economic recession with inflation at over 55%. In effect, a massive financial crisis already hit the peso last year and forced Macri to take out an IMF loan in return for promising to balance Argentina’s deficit.

The IMF’s funding sustainability is now in question, as the left-wing leader is attempting to cease IMF funds and austerity policies in the country. Argentina is the third-largest economy in Latin America, but whether it will suffer even more from the shortage of funding from the IMF will be the next question the market asks.

At the moment, the ongoing trade war will not be resolved in the near future, while the Fed, European Central Bank and the major central banks of the world are pursuing rate cuts as they predict their economies will slow down. Even though Argentina’s Central Bank may seek a further rate hike in the short-term (given that the peso has massively depreciated), it cannot change the market view that the political and economic uncertainty of Argentina still exists. Capital will still flow to safe-haven assets, bonds and trust-worthy US assets, but that means another financial crisis is tipped for Argentina this year, while the emerging markets’ outlook may also be worsening as Brazil, Uruguay, Mexico, Turkey could also suffer from the crisis in Argentina.

Morgan Stanley downgraded its recommendation for Argentina’s sovereign credit and equities from “neutral” to “underweight” and said calculations suggest the peso could fall another 20%. We agree with this recommendation and also expect the Argentina peso to continue its slump after a very short-lived recovery today.

At GMT+4 12:30pm, the UK will release its latest employment report, with market consensus projecting that the average weekly earnings year-on-year in June will have risen from 3.4% to 3.7%.

Sterling may gain further support should that be the case, as it may prove the country’s current employment situation remains strong even though the pound has dropped massively in the last month. At GMT+4 13:00, Germany will deliver its ZEW survey expectations for August, and market sentiment suggests a further worsening from -24.5 to -28, which may pressure the euro to fall.

Eyes will shift to the US CPI for July at GMT+4 16:30, as the market consensus is a recovery to 1.7% from the previous low of 1.6%. It is expected a brighter result for the CPI may galvanize the Fed to keep the current rate, instead of the market projected 0.25% rate cut for September, which will support the dollar.