Argentine Assets Surge as Ruling Party Takes Hit

Argentina's assets rallied strongly on Monday after the ruling party of Argentine President Cristina Fernandez suffered a stinging defeat in mid-term elections, suggesting she will have to compromise and perhaps drop her pursuit of populist policies.

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In a humiliating loss, former President Nestor Kirchner, Fernandez's powerful husband and predecessor, was upset in a high-profile congressional race in Sunday's elections that led him to resign as head of the Peronist party.

Argentina's discount dollar-denominated bonds surged 5.250 points to bid 52 in price. The dollar-denominated 2038 Par bonds were up 3.125 points in price to bid 26.375, yielding about 12.765 percent, according to Reuters data.

Argentine bonds, rated "B-minus", are considered highly speculative and are placed in the high-beta credit category, denoting more volatility, along with Ecuador and Venezuela.

Investors are buying up the country's bonds, currency and stocks on speculation Fernandez will likely be pressured into taking a more amicable posture toward the market, approach the International Monetary Fund, and restructure the defaulted bonds and the Paris Club debt.

The new Congress however, will not be seated until December. That will give Fernandez five months with a majority in both houses which some market analysts say she could use to increase state control over the economy.

Argentina has been cut off from international capital markets since it defaulted on its $100 billion sovereign debt in 2002.

"We think the final outcome of the elections is very positive for sovereign bonds, positive for foreign direct investment and more or less neutral for the FX rate," said Alberto Bernal, head of emerging markets fixed-income research at Bulltick Capital Markets in Miami.

The b will still depreciate because of capital flight, while the election result is neutral for equity markets, Bernal said.

Argentina's five-year credit default swaps, which offer protection against debt default or restructuring, were trading at 48 percent up front on Monday, unchanged from Friday, according to data from CMA DataVision.

In informal trade between foreign exchange houses, as measured by Reuters, the peso gained 0.32 percent to 3.8825/3.8875 thanks to intervention from the central bank, traders said. In formal exchange between banks, the peso rose 0.13 percent to 3.7875/3.79 per dollar.

The MerVal stocks index rose 2.58 percent to 1,545.81. Gains had been tempered after the U.S. Federal Reserve said last week that the U.S. economy was likely to remain weak although the pace of its contraction was slowing.

Most markets in Latin America, including Colombia, Chile, Peru and Venezuela were closed in observance of the Saint Peter and Saint Paul holiday.

The MSCI stock index for Latin America was 0.32 percent higher, as Brazil's Bovespa index rose for the second day in three, rising 1.1 percent, led by the initial public offering of VisaNet, the Brazilian affiliate of credit card network Visa .

Mexico's IPC stock index eased 0.14 percent while its peso was 0.45 percent firmer at 13.171 per dollar.

The peso was supported by news last week that the U.S. Federal Reserve had extended the duration of a $30 billion swap line with Mexico until February, giving Mexico's central bank more ammunition to provide dollar liquidity, if needed.

The Brazilian real slipped 0.72 percent to 1.954 reais to the dollar. The dollar had fallen for the previous two sessions.

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