Stocks, bonds rally over Argentina's President elect 'chainsaw' change pledges

© Reuters. Argentine president-elect Javier Milei addresses supporters after winning Argentina's runoff presidential election, in Buenos Aires, Argentina November 19, 2023. REUTERS/Agustin Marcarian

By Jorgelina do Rosario and Libby George

BUENOS AIRES/LONDON (Reuters) -Far-right libertarian Javier Milei's strong win in Argentina's presidential election is boosting bonds and equities but putting downward pressure on the peso currency, investors said on Monday.

The outsider radical, who has pledged to take a chainsaw to public spending, "burn down" the central bank and dollarize the economy, beat Peronist economy chief Sergio Massa in Sunday's vote, though he struck a measured tone in his first speech as president-elect.

The South American country's markets were closed on Monday for a local holiday. But its overseas dollar bonds, which trade deep in distressed territory, rose Monday 1.7-2 cents each to 29-34 cents on the dollar, according to LSEG Workspace data.

David Austerweil, deputy portfolio manager at VanEck, said Milei has a mandate to implement "meaningful change in economic policy," and a lot will hinge on his cabinet.

"He will need to announce an experienced economic team and present a realistic and credible economic plan quickly," said Austerweil, or there could be a run on the peso "that would become increasingly costly to stop."

Credit markets could rally if the announcements were "strong and credible," he noted, but "if nothing is announced quickly any gains will turn to losses."

JPMorgan, in a note to clients late on Sunday, said it would not change its recommendation on Argentina's international bonds from its measured "market weight" stance while it awaited clarity on Milei's policy path and ability to enact his plans.

Equities were less measured, with U.S.-listed shares of Argentine energy company YPF rallying 40% to close at $15.01 after Milei said he would look to privatize it.

Banks Grupo Supervielle, Banco Macro, Banco BBVA Argentina (NYSE:BBAR) and Grupo Financiero Galicia closed up between 17.2% and 23.9%, while the $50.8 million Global X MSCI Argentina ETF (K:ARGT) added 11.6% to close at $46.98, its highest since early September.

Milei, who will take office on Dec. 10, did not refer to "dollarization" in his first speech, raising questions about how quickly he might pursue scrapping the peso entirely.

He pledged rapid reforms to fix an economy mired in crisis. Inflation is at 143%, foreign currency reserves are more than $10 billion in the red and a recession is looming. He also signaled moderation and thanked his mainstream conservative backers Mauricio Macri and Patricia Bullrich.

"It is indisputable that a swift change from the failed economic policies of the past is imperative. The accumulated imbalances in the economy have grown too large and must be addressed promptly," economist Sergio Armella of Goldman Sachs said in a note.

Bruno Gennari, Argentina expert at KNG Securities, said the precarious international reserves would likely force a quick devaluation. Morgan Stanley said it expected at least an 80% adjustment of Argentina's official exchange in December.

The gap between the official exchange, close to 354 pesos, and the black market one at 920, suggests a devaluation near 60%.

"Unifying exchange rates and allowing this new rate to float and find equilibrium level is not feasible while the Treasury runs a large deficit funded by printing money," said Tara Hariharan, managing director of global macro research at NWI Management.

"Therefore, the top priority for Milei is to close the fiscal gap, and once that is achieved, unify exchange rates."

Milei, a TV pundit-turned lawmaker with little political experience, rode a wave of voter anger, pledging aggressive plans to slash state spending and the size of government.

Investors said they would be watching for him to stick to spending cut promises - and quickly - to buoy markets, despite fear of austerity with two-fifths of the population already in poverty.

"They cannot afford to kick the can down the road any longer," said Riccardo Grassi of Mangart Advisors, which holds Argentine bonds.

He added that Milei also needed to immediately initiate talks to get the $44 billion loan programme from the International Monetary Fund back on track.

"The IMF cannot fail this time."

Milei will be buoyed by his larger-than-expected vote take of 56% in the run-off after he got 30% in the first round vote last month. But he still faces a divided Congress where his Liberty Advances bloc only has a small share of seats.

"Having a resounding outcome like he did yesterday ... gives him a strong public mandate, particularly given his position of weakness in congress," Jimena Blanco, head of Americas with Verisk (NASDAQ:VRSK) Maplecroft, said.