Politics and economy: the three key factors that the market is looking at and will determine its next steps

The Argentine assets Last week they were torn between two opposing forces: on the one hand, Local policy that negatively impacted priceswith the setback that he suffered Freedom Advances in Congressand, on the other hand, The external factor, which brought positive news to the marketwith the possibility that the US Federal Reserve (Fed) will lower interest rates in September.

Freedom Advances hinted last week That, perhaps, one of its weakest points is the limited capacity to maintain political agreements, even within its own bloc. This signal was read by the market in a negative way. This situation was evidenced by Congress overwhelmingly approved a change in retirement mobility.

This setback, which anticipates a presidential veto according to Javier Milei himself, implied a fiscal cost of 0.5% of GDP. for this year and 1.2% of GDP for next year, putting one of the bases of the ruling party in jeopardy: the fiscal surplus. But this is not only one of the doubts that circulate in the market; there are at least three keys that the big players will be watching closely.

Key 1: Political turbulence

“We understand that the reasons behind the underperformance of Argentine assets compared to other markets were local and political. The political turbulence of the week saw a certain lack of coordination between the LLA bloc and the Pro, its main political ally. Also LLA’s own internal crises“, they explained from Outlier.

The law sanctioned by the Senate sets a recomposition of 8.1% for this year in retirement benefitsalso contemplates the inflation mobility formula and provides for an additional 50% increase in March of each year based on the wage variation indexThe Executive Branch has up to 10 business days to publish the veto and will do so between this week and the next.

Regarding the composition of the Chamber of Deputies, The current tense relationship between Javier Milei and Mauricio Macri, combined with the departure of Lourdes Arrieta from the ruling bloc, further conditions the limited power that LLA has. Thus, it will be left with 37 seats, the same number as the PRO, which will put the new game of alliances in check, in which the radicalism and Peronism also play their part.

“Tensions began to escalate on Wednesday, when The Chamber of Deputies rejected by a wide margin the DNU of reserved funds for the Intelligence Secretariat. Subsequently, the Senate approved by a large majority – 61 votes in favor of a total of 72 seats – the revision of the retirement formula, which increases them by 8%, basically for what they lost in the first three months of the year due to the rise in inflation, confirming the half sanction that had already been granted by the lower house,” they explained from Cohen.

Key 2: Economic recovery

According to data from the Monthly Estimator of Economic Activity (EMAE) published last week by INDEC, The economy shrank 3.9% in July compared to June 2023when in May it had shown an improvement of 1.9% compared to the same month last year. Excluding agriculturewhich shows high growth rates due to a deep drought in 2023, The economy contracted 8.8% year-on-year in June.

“Despite the expectations generated by the boost in the agricultural and energy sectors, Economic activity continued its decline in 2024, although we believe it has bottomed out. In June, the EMAE recorded a fall of 0.3% m/m and 3.9% yoy, with a notable boost from the agricultural sector which rose 82% yoy, while The rest of the activities experienced an average decrease of 8.7% year-on-year With these results, 2024 ended with a drop of 1.7% QoQ and 1.4% YoY,” they detailed from Cohen.

For its part, for Outlierthe performance of Local asset prices do not seem to discount a V-shaped recoverybut “it seems to be in line with the fact that we have already seen the bottom and a less aggressive recovery, but recovery at last, from there.”

Key 3: reserves, PAIS tax and cepo

“One week after the Government makes effective the reduction of the PAIS taxdemand for import payments could be more contained, although The BCRA is expected to end the week with net sales of foreign currencywhich would continue putting pressure on international reserves“, they explained from Cohen.

In a report, this stockbroker recalled that, as regards debt, The Treasury will have to face maturities of $3.6 billion ($2.3 billion in Lecap and $1.3 billion in Duales) this weekso it is important to pay attention to the conditions for Wednesday’s tender. Finally, they recalled, On Friday, the result of the foreign exchange balance for last July will be published, which will detail the reasons whydespite the high trade surplus, the BCRA lost international reserves.

“Within strictly economic terms, we understand that The statements that caused the market to continue correcting expectations regarding an extension of local exchange controls played a role in local assets. and the activity data for the first half of 2024 were lower than expected,” they explained from Outlier and they added: “We believe that The focus is once again on delivery with regard to the easing of exchange controls, the deepening of reforms and the opening of the economy”.