Argentina’s stock market sold off steeply on Monday, following the poor performance of centre-right leader Mauricio Macri in the primaries. Macri lost by 15%, much greater than the 6-7% margin most commentators were expecting, creating fears within bond markets of a national default. The country has inflation running at 30% and recorded a 30% stock market drop on Tuesday. Its currency has depreciated around 25% against the US Dollar, as investors digested a roll-back of Macri’s free-market reform agenda.
ASX lithium miners are selling off on the news, despite the backdrop of a rally in lithium more broadly. Latin America offers rich lithium deposits and the chaos in Argentina is a bellwether for the region. Galaxy Resources (ASX: GXY) declined 3.86% and Pilbara Minerals (ASX: PLS) declined 2.11% shortly after the open, as their presence within Argentina caused investors to hit the panic button.
Macri is currently using sky-high interest rates, which rose to 74% despite a recession, to control inflation. Alberto Fernández, his opponent, is in favour of using loose monetary policy to stimulate the economy and revive growth. He is also strongly opposed to a reduction in subsidies, arguing that cutting subsidies on basic goods hurt people who struggle to afford them.
What the market is most worried about however is his opposition to the country’s austerity measures and pledged to renegotiate a deal with the IMF, a move that could culminate in an Argentinian default. There is also the more sinister prospect of capital controls, yet another sign that the US-China trade war could be the start of a series of nationalistic policy changes that could bring global trade growth to a halt.
While the news in Argentina may seem a long way away for investors who don’t hold ASX equities with a presence in Latin America, share price declines in emerging markets often signal turbulence for developed markets such as ours. This is because the loss of investor confidence in the markets does not happen overnight. The bond market will signal a recession first, which has already happened. Argentina’s market selloff, combined with heavy declines in China and Hong Kong, contributes to a broader emerging market decline.
Investors should also keep in mind that measures restricting trade and financial flows were one of the main contributing factors to the severity of the great depression. As such, the current news should be monitored closely by investors, who may look to reposition their portfolio if the situation escalates.
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