Authors: Karin Strohecker and Rodrigo Campos
LONDON/NEW YORK (Reuters) – Mexican stocks fell more than 6% and the peso lost as much as 4.3% against the dollar on Monday after the ruling party performed surprisingly well in elections and appeared poised to win a majority in Congress, which markets fear could trigger a constitutional change and reduce checks and balances.
As widely expected, Claudia Sheinbaum won a landslide victory in Sunday’s presidential election. However, the scale of the gains for the Morena party and its allies surprised the markets, and some feared that the results would pave the way for the ruling coalition to carry out constitutional reforms without the support of the opposition.
A two-thirds majority in both houses of Congress still counts for Morena, who also won the Mexico City mayoral race by double digits.
The Mexican peso earlier hit a fresh seven-week low of 17.754 per dollar, down 4.29%, LSEG data showed. At 15:41 EDT (1941 GMT), the peso was trading at 17.72 per dollar, down 4.1%.
“The question is whether the Morena party has done well enough to be able to command a supermajority and try to pursue a market-unfriendly policy of constitutional reform,” said Chris Turner, global head of markets at ING.
The latest losses mean the peso has weakened by more than 4% since the start of 2024, marking a keen improvement for a currency that until recently was one of the few in emerging markets to gain against a sturdy dollar this year.
Mexico’s benchmark stock index fell 6.2%, while the dollar-denominated MSCI index fell 9.8%. The iShares MSCI Mexico ETF fell 10.8%.
“The main challenge for President-elect Claudia Sheinbaum will be to strengthen market sentiment and ensure a predictable and investment-friendly policy and regulatory framework,” Alberto Ramos, head of Latin America economic research at Goldman Sachs, said in a note to clients.
“Ultimately, the new administration will be challenged to avoid encroaching on private sector activities and free markets and to avoid further erosion of institutional quality.”
SINGLE TONE
Foreign currency government bonds were little changed, and the spread as measured by JPMorgan’s EMBIGD index increased by six basis points to 305 basis points. According to S&P Global, the cost of insuring Mexico’s five-year government debt rose six basis points to 101 basis points, while the cost of insuring Pemex rose one basis point to 471 basis points. The benchmark local debt bond yield rose 16 basis points to 9.932%, the highest since April 30, according to LSEG.
Sheinbaum, a climate scientist and former mayor of Mexico City, won the presidential election by just six votes out of ten, with 82% of the vote counted, the highest vote share in Mexico’s democratic history.
“Even if Morena lacked a two-thirds majority in the Senate, opposition parties could change their minds and favor Morena on issues that could significantly impact the business environment,” said Alejo Czerwonko, chief investment officer for emerging markets Americas at UBS Financial Services.
In February, President Andres Manuel Lopez Obrador proposed sweeping constitutional reforms, including changes to the judiciary, electoral laws, pensions and environmental regulations.
At a morning press conference on Monday, Lopez Obrador said Mexican Finance Minister Rogelio Ramirez de la O would remain in his post for some time to support facilitate the transition.
Asked about the possibility of major reforms in Congress once fresh lawmakers take office on Oct. 1, Lopez Obrador said he would discuss the topic with his successor.
“We need to get on the same page to discuss these initiatives with Claudia, as well as other things that we need to work on together,” Lopez Obrador said. “I don’t want to impose anything.”
During his term, Lopez Obrador doubled the minimum wage, reduced poverty and oversaw a strengthening peso and low unemployment rates – successes that made him incredibly popular.
Sheinbaum promised to expand the social policy that made the current president popular and led to her electoral triumph, but this will be a challenging task due to the high budget deficit and low economic growth.
JPMorgan noted the conciliatory tone of Sheinbaum’s speech, which she addressed to all Mexicans. “She also sought to reassure markets by emphasizing that her administration would guarantee an autonomous central bank, maintain the separation between economic and political powers, uphold legality and maintain disciplined fiscal policy,” JPMorgan said in a note to a client.
