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Milei's heavy defeat in Buenos Aires sets the stage for Argentina's market to sell off

The Argentinian markets are on the verge of a further selloff after a heavy defeat in Buenos Aires for President Javier Milei’s ruling party. This is raising concerns ahead of a crucial October election.

According to the official results, the Peronist opposition party won the Sunday legislative elections in the province's key region, while the radical reformist Milei party came in second.

The scale of Milei's defeat was far beyond expectations, said JPMorgan analyst Diego Pereira. He added that the resounding win for the opposition during the regional contest meant Milei had a much steeper climb ahead as he tries to deliver a successful outcome at the national midterm election on October 26.

The administration could recalibrate its political strategy in order to correct missteps made over the past few months.

According to the official count, the Peronists have won 46.8% in the province. The candidate from Milei's Party has taken 33.8%.

Argentina, one of the biggest reform stories in emerging markets since Milei was elected president in December 20,23, has seen its market come under pressure over recent weeks.

Markets were impacted by political woes and economic pressures. The latter included allegations of corruption involving Milei’s sister Karina Milei and a sharp drop in government and consumer confidence.

MARKET SELLOFF

Since the scandal broke out, Argentina's main stock index has fallen by around 20%. Its international government bonds are also down and the pressure on the newly unpegged peso has forced the authorities to intervene in the foreign exchange market.

Investors said that early market indicators priced a 5 to 6-point drop in the international bonds of the country.

Viktor Szabo is the portfolio manager of Aberdeen Investments.

Morgan Stanley warned that international bonds would fall by up to 10 percentage points if Milei's radical reform agenda was thwarted.

JPMorgan stated that the currency was also vulnerable to further weakening, which could force central banks to reduce their FX spot reserve to absorb excess pesos.

Wall Street banks, however, said that the election dynamics in the rest of the nation would be different from Buenos Aires – a Peronist hotspot.

The Milei government was also expected to adhere to its fiscal discipline programme despite economic difficulties.

The PBA election was held amid tightening domestic financial conditions. This included a depreciation in the peso and expectations for a slight increase in inflation in August. It also coincided with a slowdown in economic growth, according to Goldman Sachs' analyst Sergio Armella.

The provincial election will have very little impact on the policy mix adopted by the Milei government, but it is a setback in terms of politics for the government.

(source: Reuters)