The Law on the Foundations, with which Javier Milei wanted to deregulate the economy and address the fiscal deficit, went back to zero this Tuesday and the market took notice. With the president in Israel, the ruling party lost the vote of deputies, He withdrew the law and accused the governors of “treason.”
Although Milei’s legislative weakness has been priced in by investors since his arrival in the Casa Rosada, the political setback has had an impact on Argentine asset prices. The bonds and shares of Argentine companies listed on Wall Street are moving in the red and the blue dollar rises by 3.5%, to 1,185 dollars. Financial dollars are also advancing: The stock market dollar rises 2%, to $1,210, and the cash dollar rises 1.5%, to $1,272.44.
What are the keys to understanding why the market reacted in that way:
Political tension
The market is closely following the government of Javier Milei, essential to implement the proposed reforms. In the consultancy firm Aurum Valores they explained: “The fall of the law by decision of the ruling party and the posts of the Presidency demonstrate a decision of increase political tension. “The path appears dangerous given the political configuration chosen by the company in 2023.”
“It is in this context of political weakness of the party in power AND atomization of the opposition That a broad availability for dialogue is necessary to achieve the profound changes that inherited economic precariousness requires. Not understanding this primordial need can put us face to face with a critical economic, social and political panorama”, they added.
Along the same lines, the PPI notes: “Although strong differences with the opposition in dialogue on some relevant points of the law were already known, this scenario was not taken for granted by the market. Since the market does not like surprises, We await a response from the Argentine assets. The probability of execution of the plan has always been key to the market perception of La Libertad Avanza.”
Excessive optimism?
In recent weeks, Argentina’s debt had proven to be very solid and had even managed to do so decoupling from the vagaries of global markets. Dollar bonds have accumulated improvements of up to 15% since the beginning of the year.
“However, huge local uncertainty is the reason we still see our bonds trading between $35 and $40, far away from other global comparables,” they noted in Delphos and said: “This ‘stumble’ does not meet prices of bonds that discount a perfect Argentina, otherwise perhaps it could be said that they largely incorporate these types of political disagreements.
Country risk, high
The JP Morgan banking indicator has improved slightly since the arrival of Javier Milei in government, but still remains at considerably high levels. This Wednesday the country risk remains around 1,880 units and has never managed to exceed the threshold of 1,800 points since last December 10th.
Alignment with global markets
The weakness shown by Argentine assets this Wednesday coincides with the uncertainty that has been generated in global stock markets in recent days as the chairman of the United States Federal Reserve, Jerome Powell, said so A lower interest rate scenario is further away than the market expected.
“In a context of legislative failure like the current one, it is time to remember this The global context matters more than what happens locally, as long as they are not large deviations. This means that much of the rise in Argentine stocks (beta-adjusted) and government bonds since the end of last October can be explained by an international context characterized by lower global interest rates, dollar weakness and asset-friendly capital movements risky. . This movement has begun to show some weakness since the beginning of this year, but our resources have found the local fuel to decouple and cut each other”they told Delphos.
Source: Clarin
