Cumberland Advisors Market Commentary – Cry for Argentina
Argentina’s primary election on Sunday, August 11, surprised everyone and shocked markets as the current president, Mauricio Macri, was defeated by 15.6 percentage points by the left-wing Peronist candidate, Alberto Fernandez. Macri now appears to have only a very slim chance to win the October 27 presidential election. His tough austerity measures, which were needed because of the serious state of the country’s economy and finances, have not been successful and have proved to be very unpopular.
Markets reacted strongly early last week, with stocks, bonds, and the peso tumbling. At the end of the day on Monday, August 12, the main Argentina stock index, MERVAL, closed down 31% and Argentine sovereign bonds were down by 15 to 20 points. During the week Fitch cut the sovereign bond rating by three notches to CCC and S&P Global cut its rating on notch to B- with outlook negative At the end of the week the 10-year bond rate was 25.14 %, calculated from the yields of other available durations. One month ago the rate was 24.5%. The peso was down 15% after having initially swooned 30%. There has been some, though still modest, contagion spreading to other emerging-market sovereign credit markets. Argentina accounts for 5.5% of the Bloomberg Barclays EM US Dollar Sovereign Index.
Investors are clearly fearful of economic policies taking a left turn at a time when the economy is in recession: Growth declined 2.5% last year and 5.8% in the first quarter of 2019. Argentine inflation is among the world’s highest, registering 22% for the first half of the year.
Alberto Fernandez was declared a candidate in May by the former president, Cristina Fernandez de Kirchner, who declared herself as the candidate for vice-president. Kirchner’s period as leader was marked by heavy-handed government intervention in the economy and ill-conceived currency controls and government subsidies. Fernandez has not provided any details of his economic policies. He is strongly critical of Macri’s austerity policies, but he has indicated he will be more pragmatic and moderate than Kirchner was.
Macri, seeking to close the shortfall in his popularity, looks likely to move to the left, easing the austerity imposed as part of the country’s agreement last year with the International Monetary Fund for a $50 billion “preventive credit line.” He already has announced income tax cuts, increases in welfare subsides, a second increase this year in the minimum wage, and a 90-day freeze on gasoline prices. His economy minister Nicolas Dujovne has now resigned, saying the economic team needed “significant renewal”.
Investors’ concerns about these developments are well-founded. Argentina’s ability to meet its financing needs is at risk as investors appear increasingly hesitant to buy the nation’s bonds. Interest rates on seven-day notes were increased from 63% to 74% after the election. The country may need to ask the IMF to bring forward scheduled 2020 disbursements of its credit line.
The currency looks likely to remain under pressure. Macri’s presidency, which began in 2015, has already witnessed two other steep falls in the peso, one of 30% when Macri ended currency controls and one of 25% last year. These devaluations have serious effects on domestic businesses, for which most costs are dollar-based. And consumers are hit by a crippling increase in inflation.
The Global X MSCI Argentina ETF, ARGT, declined 24% on Monday August 12, and a further 4% on Tuesday. The markets for Argentine assets stabilized mid-week after speeches by both presidential candidates. ARGT ended down 24.4% for the week. These developments are a good example of how individual emerging-market economies can experience significant unanticipated risks. Emerging markets are currently experiencing high volatility and are under pressure from slowing global markets, trade wars, and a strengthening US dollar. At Cumberland Advisors we do not hold ARGT in our International or Global ETF Portfolios and have reduced our emerging-market holdings.
Sources: Financial Times, Barclay’s, BBC.com, CNBC, Yahoo Finance, Global Government Bonds
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