Uneven market reaction to Fernández’s withdrawal

The market was “somewhat indifferent” to the president’s drop out of the elections, analysts say

The markets reacted unevenly, if at all, to President Alberto Fernández’s decision that he would not seek his re-election for a second term, with certain Argentine bonds law and the parallel US dollar exchange rates seeing a surge.

“The news, due to its timing, is somewhat lost in the midst of the exchange rate shocks and is somewhat ineffective — either to calm them down or to encourage them,” consulting firm Eco Go told the Herald.

However, in the context of a rough economic week for the country, the announcement did not go unnoticed by all quarters.

Dollar uncertainty 

The parallel dollar exchange rates are continuing a particularly sharp upward trend that started this week and reachedleft the US currency at record highs. The blue-chip swap exchange rate is at AR$452, having closed yesterday at AR$4365.74. The informal dollar exchange rate, or “dólar blue” as it is popularly known, also saw a surge. Yesterday it was valued at AR$ 423 and crept up to AR$ 445 today.

Pablo Repetto, Head of Research at the Aurum broker, told the Herald that the announcement was somewhat negative, but that the reserve scarcity, produced by the drought, is the biggest culprit of today’s dollar surge.

“The withdrawal of the president’s candidacy generated some anxiety. It was not expected at this point,” he said. “Based on our money mass metrics, we calculated that the blue-chip swap rate could be between AR$ 445-450.”

“Monetary, financial, and exchange conditions were ripe for a rise in the dollar. It just needed a triggering factor,” added Repetto. 

An important broker in the Argentine financial market told the Herald that the markets could calm down if all presidential hopefuls are revealed to be “pro-market,”, which is not a given today since there is not a definitive candidate line-up. Those sources think that Fernández’s announcement removes some of the political noise, but it won’t end up in “significant improvements.”

Similarly, Eco Go told the Herald that Fernández’s decision to drop out of the presidential race “does not generate any certainty about the current workings of the government,” which is today unable to control figures like inflation, the parallel exchange rates or the number of international reserves.

“It does not explain the behavior of the market, which is more dependant on what happens with the new edition of the ‘soybean dollar’ and the capacity of the Central Bank to get hold of the dollars liquidated by the agricultural sector and the regional economies,” they told the Herald.

Argentina is suffering the consequences of a historic drought that negatively affected its agricultural production and reduced the capacity of the Central Bank to accumulate international reserves, a fundamental requirement to sustain economic activity. 

“Even the financial dollars today remained completely indifferent to both the purchase of foreign currency by the Central Bank and the non-candidacy of the incumbent president,” Eco Go said.

“The question is how much the Central Bank can withstand.”

The bond market

Argentine Global bonds — securities issued by the national government in U.S. dollars under New York law– surged today after the President’s announcement.

The Global 30 (GD30) bond is leading the way with a 4.3% increase. The Global 35 (GD35) and AL41 bonds follow suit, with a 4% and a 3.2% jump respectively. Behind them are the AE38 and the AL30, with 2.6% and 2.8% surges.

All of those bonds bounced back from a downward trend, after falling consistently during the last thirty days.

The financial broker told the Herald that those bonds are still cheap and that the market is not expecting an aggressive restructuring with big removals. They do not consider Fernández’s announcement to have had a role in their surges.

The Merval index, which measures a basket of stocks selected on the basis of their liquidity, saw a 2.5-point increase today. Conversely, most Argentine ADRs — negotiable securities that represent foreign company securities from the US financial markets— dropped.

“We have to see how these new developments are absorbed, and what conditions the International Monetary Fund (IMF) has set to recalibrate the targets,” Repetto said.

The government and the IMF signed an Extended Fund Facility agreement in 2022 after renegotiating the US$44 billion debt former President Mauricio Macri acquired in 2018. The deal includes an economic program that Argentina must comply with in order to receive disbursements every three months, which are used to pay for the previous debt with the IMF.

In its last review of the program, the IMF “relaxed” the reserve accumulation target due to the historic drought. This week, according to official figures, the government revealed it also missed the fiscal deficit target for the first quarter of 2023.

According to Repetto, the ongoing negotiations with the IMF and the missed targets are “an additional factor of uncertainty.”

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