Investing.com – The investment bank Barclays (LON:) considers that the markets have overreacted to the June 2 elections in Mexico, in which the ruling political force, made up of the Morena, Labor Party and Green Party, obtained the presidency of the Republic, the qualified majority in the Chamber of Deputies and a large majority of the seats in the Senate to a single political force.
In an analysis note, the strategists recognize that this has focused attention on the reforms of President Andrés Manuel López Obrador, known as “Plan C”, which, they say at Barclays, “point to institutional deterioration and possible fiscal pressures.” But they are clear in their position: this will not mean the end of democracy in Mexico.
“While this (the reforms) could imply a slow long-term process, democracy will not collapse and we struggle to identify the direct short-term implications of the election for the local market,” they said.
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It is worth remembering that one day after the elections, on Monday, June 3, the closed the session with a drop of 4%, while the CPI of the Mexican Stock Exchange (BMV) closed with a loss of 6.1%, both were the largest setbacks recorded since the start of the Covid-19 pandemic, in March 2020.
“We continue to think that the peso went too far with the election results and we see room for relief from now on. The magnitude of the movement was also driven by strong positioning, as the Mexican peso was one of the carry trades busier,” they mentioned in Barclays.
Market volatility has increased in recent sessions after the coordinator of Morena deputies, Ignacio Mier, said that the reforms of “Plan C” will be discussed in September. This morning, from the National Palace, López Obrador mentioned that these reforms will go ahead before the end of his six-year term, especially the reform of the Judiciary, and justified: “justice is above the markets.”
“The interpretation given by the market is that the reform is going ahead regardless of the reaction of the prices of assets denominated in Mexican pesos,” said Jorge Gordillo Arias, director of Economic and Stock Market Analysis at CIBanco.
Thus, from Monday’s fall until after noon this Friday, June 7, the Mexican peso observed an accumulated depreciation of 8% against the US dollar, while the main stock index of the Mexican market suffered a loss of 3.7%.
“While local markets are likely to remain pessimistic about the prospects for reforms, and there will certainly be noise on this front between now and September, this is very reminiscent of 2018, when AMLO first took office,” they said. from Barclays.
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The next market catalysts
Given this scenario, Barclays considers that global factors will be a more relevant factor than the local political environment, especially given the importance of the United States Federal Reserve (Fed) for emerging markets and the close links between the US economy and Mexican. In addition, they will closely follow the monetary policy decisions of the Bank of Mexico (Banxico).
“The recent sell-off of the peso is unlikely to pose significant risks to this revised (inflation) forecast, as the pass-through in Mexico is not particularly high (Banxico estimates it to be 4%), especially when the currency is volatile and It does not give prices the opportunity to react,” they explained.
At Barclays they recalled that markets are currently discounting a discontinuous cycle in interest rate cuts, with approximately 60 basis points for the year, and a final limit of 9.50%.
“While we agree with a discontinuous cycle, the risks are skewed towards the market pricing in more cuts, rather than fewer, as growth should slow later in the year and sticky services inflation should finally begin to lift.” decrease, at least compared to Banxico’s forecast,” they mentioned.
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