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Argentine markets in free-fall after Macri suffers reelection setback

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Source: Associated Press

Presidential candidate Alberto Fernandez addresses supporters at the "Frente de Todos" party headquarters after primary elections in Buenos Aires, Argentina, on Aug. 11.

Argentine bank stocks plummeted alongside the broader market on Aug. 12 as the odds of the country's returning to Peronist rule dramatically rose following primary elections over the weekend.

Alberto Fernández, the main opposition to incumbent Mauricio Macri in Argentina's October presidential election, held a 15.5-point advantage in the Aug. 11 primary vote, far stronger than what polling had suggested.

"We are all quite surprised since the polls did not see this kind of spread. So we have a massive sell-off today as investors get afraid that we are going back to the old days of Cristina Kirchner," Greg Lesko, a portfolio manager with U.S. Deltec Asset Management, told S&P Global Market Intelligence.

The benchmark MERVAL stock index sank nearly 38% in Aug. 12 trading, while shares of several major Argentine banks lost more-than half their value. Short-term bonds booked losses approaching 30%, and the Argentine peso weakened by about 21.8% against the U.S. dollar. In debt markets, the yield on dollar-denominated short term bonds nearly doubled to over 35%, with investors pricing in a greater probability of default.

"It's a situation that not even the opposition was expecting. We are seeing a very aggressive reaction from the market and we still do not know where the bottom is," said Fernando Baer, an economist with local financial firm Quantum.

Fernández, a former cabinet chief under the governments of both Néstor Kirchner and Cristina Fernández de Kirchner, led a broad coalition that included running mate Cristina Fernández as vice president to secure 47.6% of primary votes. Macri won 32.1% in the round, casting serious doubts on his chances to win reelection. If Fernández repeats his performance at the Oct. 27 presidential elections, he will clinch the presidency in the first round, as only 45.0% is necessary to avoid a run-off election.

This was "a K.O. punch to Macri," analysts from Argentine broker Balanz Capital said in a note to investors, noting that difference between the two main candidates came "largely above market expectations."

Preelection polls had put Fernández ahead, but within a range of 2 to 8 points, in most cases. Market players had signaled 3 to 4 points as a neutral outcome for markets since investors assumed that such a narrow margin could ultimately be reversed in the Oct. 27 general election. But with more than 15.5 points between the two candidates, analysts believe the margin might be too significant for Macri to overcome.

During an Aug. 12 press conference, Macri pointed to the sharp market reaction as proof that "the economic and political world does not trust Kirchnerism in what it pretends to do."

In the 2015 presidential race, Macri staged a comeback from defeats in both the primaries and the first round to clinch the presidency from the opposition party in a close runoff. But austere economic policies during his tenure have failed to deliver on inflation and currency stability.

The surprise results triggered an abrupt change in investor sentiment. Equity markets had risen sharply on Aug. 9, signaling that investors had placed last-minute bets on a more favorable outcome for the current government.

The share prices of several major banks, including Grupo Financiero Galicia SA, Banco Macro SA and Grupo Supervielle SA, sank by about 55% on U.S. exchanges, amid a sharp repricing across Argentine assets.

"The concern now is not who will be the next president, but rather what scenario investors imagine for Alberto Fernández," the analysts at Balanz Capital wrote. They estimated that the peso will settle at about 70 pesos per U.S. dollar should the Fernández-Kirchner ticket win.

"When you look at Fernandez, he has been more of a centrist than his supporters," Lesko from Deltec said. "Question is: Who is gonna run the country? How are they gonna run it? It is pretty uncertain now ... Argentina did default with Cristina Kirchner. We need some reassurances from candidate Fernandez," he said.

"We've still got to see where financial variables are going to settle. The morning daily auction of Leliq notes and U.S. dollar by the central bank is a signal that the policy agreed with the IMF continues despite the fluctuation of interest rate and exchange rate being at different levels," said Alejandro Henke, head of Proficio Investment and a former director at Banco de la Nación Argentina under the Macri administration.

Banco Central de la República Argentina, which gained clearance to intervene in the currency market under an agreement with the International Monetary Fund, had not issued a response to the market reaction as of close of trading on Aug. 12. Macri said measures had been taken by the central bank but did not offer details.

For the time being, interest rates paid on its Leliq notes rose by roughly 10 percentage points to over 74.0% in an attempt to partially moderate downward pressures on the peso.

As of Aug. 9, US$1 was equivalent to 45.45 Argentine pesos.