Election defeat hits reform confidence, causing a comprehensive collapse in this emerging market. Morgan Stanley only called for increased positions last week.

The Argentinian market experienced a widespread crash on Monday, with sovereign bonds, stocks, and the local currency peso all taking a heavy hit. The reason was that President Mille's party suffered a devastating defeat in local elections in the province of Buenos Aires, sparking concerns in the market about the continuation of his economic reform agenda. Among global emerging markets, Argentinian assets were the biggest losers of the day. Sovereign bonds due in 2035 plunged by 6.6 cents to 55 cents per dollar, with the yield soaring to 12.9%, marking the largest single-day drop since 2020. The largest Argentinian ETF in the world, Global X MSCI Argentina (ARGT.US), plummeted by over 10% during trading in New York. The Argentinian local stock market Merval Index nosedived by 13%, marking the largest intraday decline since the COVID-19 pandemic in 2020. Morgan Stanley's recommendation to increase holdings in Argentinian assets, which was released last week, was urgently canceled on Monday. The firm warned that this electoral defeat would raise doubts in the market about the sustainability of the reform agenda and increase uncertainty about external financing prospects. In the local market, the Argentinian peso plummeted by 7% at the opening but later slightly recovered to 1,425 pesos per dollar, approaching the official intervention limit of 1,470 pesos. Analysts predict that if this limit is breached, the central bank will be forced to intervene directly in the market. However, due to limited foreign exchange reserves in Argentina, markets are worried about the sustainability of the central bank's use of reserves to stabilize the exchange rate. Barclays analyst Ivan Stambulsky pointed out, "The Economy Ministry has stated that there will be no change in foreign exchange policy, but if interventions continue to deplete reserves, the market will start to worry about whether the government will be forced to allow further depreciation of the peso before the mid-term elections in October." In the elections in the Buenos Aires province on Sunday, Mille's party received only 33.7% of the votes, trailing behind the opposition by a massive 13.6 percentage points with 99.98% of the votes counted. This province represents 40% of the national electorate, and investors had expected that if Mille's camp lost by more than 5 percentage points, it would trigger asset sales. The actual results far exceeded the market's most pessimistic expectations. J.P. Morgan analyst Diego Pereira stated, "This devastating defeat far exceeded market expectations, meaning Mille will face a tough battle in the national mid-term elections on October 26. Over the next five weeks, the government may adjust its political strategy to address a series of recent mistakes." The results of the elections in Buenos Aires province have become a crucial indicator for investors to assess the national political sentiment, heightening concerns in the market about Mille's ability to implement radical economic reforms. After the election results were announced, Mille acknowledged the defeat in his speech and promised to conduct a "profound self-reflection," while vowing to continue the existing economic reform agenda, including foreign exchange controls, monetary tightening, and fiscal reform. Recently, the Mille government has been tightening liquidity in the financial sector to support the peso, but the side effects have been a surge in interest rates, dampening economic growth. Goldman Sachs Group, Inc. analyst Sergio Armella noted, "While the impact of local elections on the policy mix itself is limited, their political significance is significant, showing that the government's ruling base is under pressure." Bloomberg Economics Research believes that this defeat could trigger a "negative cycle," in which asset prices plummet, policy responses become more aggressive, and economic expectations further deteriorate. UBS Emerging Markets and Asia-Pacific Fixed Income Director Shamaila Khan stated, "The results of the mid-term elections will determine the performance of Argentinian assets in the coming months. Relying solely on reserves to support the exchange rate is not enough to reassure the market."