By Karin Strohecker and Rodrigo Campos
LONDON/NEW YORK (Reuters) -Mexican shares fell more than 6% on Monday and the peso closed at its weakest level against the dollar since November, after the country’s ruling party posted a surprisingly strong election result and looked set for a supermajority in Congress. Fear in the markets could lead to constitutional changes and weaken checks and balances.
Claudia Sheinbaum won a landslide victory in the presidential election on Sunday, as was widely expected. But the size of the gains for the Morena party and its allies surprised markets, with some fearing the results would pave the way for the ruling coalition to implement constitutional reforms without opposition support.
A two-thirds supermajority in both chambers of Congress is still in prospect for Morena, which also won the Mexico City mayoral race by a double-digit margin.
The Mexican peso earlier hit a new seven-week low of 17.754 against the dollar, down 4.29%, LSEG data showed. It ended the session down 3.8% at 17.671 per dollar, its weakest daily close since November.
“The question is whether the Morena party has done so well that it could win a supermajority and try to pursue market-unfriendly policies of constitutional reform,” said Chris Turner, global head of markets at ING.
The latest losses have weakened the peso by more than 4% since the start of 2024, a sharp turnaround for the currency, which until recently was one of the few in emerging markets to gain ground against a strong dollar this year.
Mexico’s benchmark stock index ended the session down 6.1%, while the MSCI index, priced in dollars, fell 8.8%. The iShares MSCI Mexico ETF closed 10.7% lower.
“The key challenge for newly elected President Claudia Sheinbaum will be to strengthen market sentiment and provide a predictable and investment-friendly policy and regulatory framework,” Alberto Ramos, head of Latin America economic research at Goldman Sachs, said in a statement. customer note.
“Ultimately, the new administration will be challenged not to encroach on private sector activities and the free market, and to prevent further erosion of institutional quality.”
CONCILIATIVE TONE
Foreign currency government bonds are little changed overall, with the spread measured by JPMorgan’s EMBIGD index widening by six basis points to 306 basis points. The cost of insuring five-year Mexican government bonds through CDS rose six basis points to 101 bp, according to S&P Global, while Pemex rose one basis point to 471 bp. Local bond yields rose 16 basis points to 9.934%, the highest since April 30, according to LSEG.
Sheinbaum, a climate scientist and former mayor of Mexico City, won the presidency by just six votes in 10, with 92% of votes counted, expected to be the highest voting percentage in Mexico’s democratic history.
“Even if Morena were to fall a little short of securing a two-thirds majority in the Senate, opposition parties could favor Morena on issues that could have a significant impact on the business environment,” said Alejo Czerwonko, Chief Investment Officer for Emerging Markets America at UBS Financial. Services.
In February, President Andres Manuel Lopez Obrador had proposed sweeping constitutional reforms, including measures to overhaul the judiciary, electoral law, pensions and environmental regulations.
Lopez Obrador said at a morning news conference on Monday that Mexican Finance Minister Rogelio Ramirez de la O would remain in his post for some time to help ease the transition.
When asked about the possibility of introducing major reforms in Congress once new lawmakers take office on October 1, Lopez Obrador said he would discuss the subject with his successor.
“We need to get on the same page to discuss these initiatives with Claudia, as well as other things we need to work on together,” Lopez Obrador said. “I don’t want to impose anything.”
Over the course of his term, Lopez Obrador had doubled the minimum wage, reduced poverty and overseen a rising peso and low unemployment levels – successes that made him incredibly popular.
Sheinbaum has pledged to expand the social policies that boosted the current president’s popularity and led to her election victory, but it will be a difficult task given the large budget deficit and low economic growth.
JPMorgan noted the conciliatory tone of Sheinbaum’s acceptance speech, which she addressed to all Mexicans. She also “sought to calm markets by emphasizing that her government will guarantee an autonomous central bank, maintain the separation of economic and political powers, adhere to legalities and maintain disciplined fiscal policy,” JPMorgan said in a client note .
