How markets will react based on election results

The primary, open, simultaneous and mandatory (STEP) elections next Sunday will show investors the political reality of Argentina.

The data from the polls of the last few months will be distant and it will be known with certainty how many votes each of the presidential candidates got for the general elections of October 27th.

The markets support the re-election of Mauricio Macri and cast a suspicious look on his main rival, the candidate of the Todos Front Alberto Fernández.

"The generally accepted view is that the markets will tolerate a 5% disadvantage for President Macri" on forecasts that a recovery in growth will help reverse the difference compared to Fernandez, Siobhan said Morden, Head of Fixed Income Strategy for Latin America. Amherst Pierpont Securities, report to customers according to the Bloomberg agency.

The results of the STEP will therefore depend on movements in equities, bonds and the dollar in the near future.

If Macri were well positioned, badet prices could rise. But if Alberto Fernández took an advantage, the markets could collapse. Everything will be a matter of margin in such a tight choice.

Here are some possible scenarios:

– difference of 4 to 6 points: stability

If the formula Alberto Fernández – Cristina Kirchner wins by 4 to 6 percentage points, the Central Bank will continue its current policy of defense of the peso with high real interest rates, while trying not to suffocate. the nascent economic recovery.

"The spreads of foreign law dollar bonds will again be between 900 and 950 basis points", compared to 886 currently, told the press agency Juan Manuel Pazos, chief economist of TPCG.

"The ARS will be aligned with its emerging market peers and the central bank will likely continue to sell futures to keep the FX anchored," he said.

– Less than 4 points: rally

A slight difference in favor of Fernández could trigger a rebound due to speculation that a recovery in economic growth would allow Macri to narrow the gap.

"Given this starting point, Macri would add the 5 to 6 voting points of the undecided," said Ezequiel Zambaglione, director of strategy at Balanz Capital Valores in Buenos Aires. "If there is a positive momentum in the currency market and confidence in the government increases, it could cause Macri to increase the number of undecided people he can capture," he said. declared.

Zambaglione sees a country risk of 800 basis points in this scenario. But if the elections show a connection between Macri and Fernández, this differential could fall to 700 basis points. Even at a lower level if the current president prevailed in the vote.

With a narrow gap between the two candidates, the ARS would initially gain around 4%, then stabilize in nominal terms, while continuing to strengthen in real terms, wrote Citigroup badysts headed by Fernando Diaz.

– More than 6 points: fall

"A difference of more than 6-7 percentage points could be an insurmountable hurdle, especially in a highly conflictual and polarized political environment," said a Goldman Sachs badyst, led by economist Alberto Ramos.

"The likely negative reaction of the market in this scenario would certainly complicate the task of the president," he said.

TPCG estimates that, in this case, the yield spread could reach more than 1,500 basis points.

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