The S&P Merval rebounds strongly, ADRs show gains, and dollar-denominated bonds recover part of what was lost
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Argentine financial markets reacted with a recovery this Tuesday after the sharp plunge recorded in the previous session, as a consequence of the electoral defeat suffered by the Government in the legislative elections in the province of Buenos Aires.
The S&P Merval index of the Buenos Aires Stock Exchange advanced 2.3% to 1,770,000 points, after having fallen more than 13% in the previous session, in a context of marked political and economic uncertainty.
The improvement also extended to Argentine assets traded on Wall Street. Among the ADRs and local stocks listed in dollars, the positive sign prevailed, with YPF leading the gains with a rebound of 6.4%, to 27.47 dollars.
La mejora se extendió también a los activos argentinos negociados en Wall Street.
Meanwhile, sovereign bonds in dollars recovered on average 1.5% after Monday's sharp 8% correction. Despite the improvement, the country risk index calculated by JP Morgan remains above 1,000 basis points: after reaching an intraday high of 1,108 units in the previous session, it adjusted 33 points to settle at 1,075.
The electoral setback, with a difference of nearly 13.5 points in favor of the opposition, had an immediate impact on investor confidence. The president convened a political roundtable on Monday with the aim of expediting changes and opened a channel of dialogue with the governors, in an attempt to contain the political and economic discontent.
The defeat, however, highlighted a growing distance between the administration and the electorate of the country's main province.
In the foreign exchange market, the wholesale dollar was trading at 1,420 pesos, after having reached a nominal record of 1,450 on Monday at midday, still below the upper limit of the floating band. The Treasury's intervention helped moderate pressures in the foreign exchange market.
Santiago Bulat - Socio y director de Invecq Consultora Económica.
"Markets expected a loss for the ruling party (in the elections), but not as large as what happened. The good news is that, for now, the dollar hasn't tested that upper band yet", explained economist Santiago Bulat, partner and director of Invecq Consultora Económica.
Bulat warned, however, about the tensions caused by the current interest rate scheme. "The complexity lies in the firmness of interest rates as a brake on the economy, at a time when the bank reserve requirement is around 53.5%—the highest since the early 1990s", he pointed out.
Currently, nominal annual rates are between 50% and 60%, depending on the type of business.
In this context, the Government faces a new auction for maturities of domestic debt amounting to about 7.5 trillion pesos, which will test its financing capacity in a scenario of weakened confidence.
