Happy Tuesday!

📝 Focus

• Don’t Cry For Me (Argentina)

📊 In the Markets

• EM shocks, Asia Slides

📖 MoneyFitt Explains

🎓 Currency Crisis

📝 Focus

Don’t Cry For Me

Argentina devalued its official peso (ARS) rate by 18% to 350 per US Dollar on Monday and raised interest rates by 21 percentage points to 118% after political outsider Javier Milei, a radical, right-wing libertarian and outspoken Donald Trump fan who has who threatened to “burn down” the central bank, slash spending and taxes and replace the peso with the dollar, unexpectedly won Argentina’s residential primary poll with 30.1% of the vote. The legal parallel "blue-chip swap" exchange rate, derived from buying shares locally and then selling them abroad for US Dollars, fell to 690. The IMF, which has a $44bn aid/loan programme, said that it “welcomed the authorities’ recent policy actions and commitment” to improving “fiscal order.” Milei seems to be in the strongman mould of Bolsonaro of Brazil or Duterte of the Philippines and thinks climate change is a lie, has characterised sex education as a ploy to "destroy the family", believes that the sale of human organs should be legal and wants to deregulate gun sales. The primaries in Argentina involve all voters, not just party members, so act rather like the first round of elections ahead of the actual ones in October.

..... ▷ The move from the BCRA, the Banco Central de la República Argentina, followed a sharp fall in Argentina’s already-distressed USD currency bonds, with the ones maturing in 2035 and 2041 each down intraday by more than 4 cents 27.5 and 29.4 cents on the dollar respectively, price levels that were seen in the 1990s currency crisis🎓 prior to Argentina’s 2001 sovereign default, the largest ever at the time. Argentina had been pegged to the USD via a currency board called the Convertibility Plan, with the government issuing complex bonds ("Brady Bonds") backed by the US Treasury, but it wasn't enough to prevent the currency from collapsing due to the country's massive budget deficit. (Even in the middle of the USD peg era, there was a 40% devaluation in 1994 due largely to the contagion from Mexico's 1994/95 Tequila Crisis - see below.) It was the country’s sixth default -the first was in 1827- but not its last… there have been two more since, the latest being in 2020.

..... ▷ The underlying problem in Argentine is, as usual, the lack of confidence domestically and internationally in the government’s capacity to put together and execute a credible economic plan. This has shown up in its hyperinflation, running in June at over 115% per year (or 6% a month), the highest since 1991, and a large budget deficit (i.e. the government is spending more money than it is taking in) which puts pressure on the country's finances and makes it difficult to repay the country's debt (which pushes up the price of borrowing, the interest rate, which also crushes the local economy.) All this shows up in the already weak currency, which continues a vicious cycle by making imports and foreign debt payments more expensive. Argentina's External Debt accounts for just 45% of the country's Nominal GDP in 2022, well below the all-time high of 152.3 % in Dec 2002, though that's obviously no guarantee that it will meet its obligations. (In perspective, many other countries have higher national debt ratios, such as Japan and the US at 260% and 130% of GDP.)

History Geek Corner:

Mexico's 1994/95 "Tequila Crisis" was caused by weak economic fundamentals and huge amounts of foreign debt and led to speculative attacks on the Mexican Peso (MXN) that were met with currency controls. This led to a loss of confidence and increased risk premium for debt ​​in emerging markets, including Asian countries, though contagion was felt more directly across Latin America. This made it more difficult and expensive for all EM countries to borrow money from international lenders. (When the Asian Financial Crisis hit a few years later, those countries were already vulnerable and were unable to withstand the shock.)

📊 In the Markets

The S&P 500 and Nasdaq surged on Monday in light Summer trading, led by Nvidia's 7.1% jump after an analyst rated it a top pick ahead of its earnings report next week (amid news of huge AI chip orders from Saudi and the UAE), lifting the tech-heavy Nasdaq and other semis, including direct competitor AMD +4% and memory chipmaker Micron +6%. Tesla dropped 1.2% after announcing fresh price cuts on some Model Ys in China, while Warren Buffett's Berkshire announced $814mn invested in US homebuilders DR Horton, Lennar and NVR. Rising Treasury yields lifted the dollar, briefly breaching JPY145, and kept downward pressure on gold. The focus for the rest of the week is on July retail sales figures (plus Target and Walmart earnings) and the Fed's meeting minutes. The Fed is expected to keep interest rates unchanged in September.

EM shocks: Argentina's shock primary election upset the political and economic landscape of the troubled Latin nation (above) and with the collapsing Russian Ruble, is unnerving Emerging Market (EM) investors. Russia’s central bank, the CBR, said it might hike key interest rates after the rouble crossed 100 to the US Dollar, though it has since strengthened back to the strong side of that psychological level (i.e. one USD buys fewer than 100.)

Asia slide: Earlier, shares in Asia slid as the property crisis in the biggest EM of the lot, China, fuelled calls for more aggressive government stimulus, though Beijing appeared unresponsive. European markets had mixed reactions, but the more mining-oriented and hence more heavily China-exposed FTSE weakened. Chinese property giant Country Garden's woes compounded economic challenges and missed payments from Zhongrong International Trust to two listed firms added to the overall sense of unease. Investment, retail sales, unemployment and industrial production figures for July will be released on Tuesday.