Sheinbaum shakes markets: The worst day for Mexican assets

Claudia Sheinbaum

IMPORTANT POINTS:

  • Sheinbaum won approximately 60% of the vote, triggering volatility in the markets.
  • The Mexican peso fell 3.9% to 17.68 per dollar, its worst day in four years.
  • US-listed Mexican stock ETFs suffered double-digit losses, with EWW falling 10.8%.

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Financial assets related to Mexico suffered their worst day on Monday since the world went into lockdown in March 2020, following the landslide victory of newly elected President Claudia Sheinbaum.The Mexican peso fell 3.9% to 17.68 per dollar, recording its worst day in four years. It is on track to close the session at its weakest level since November 2023.

Exchange-traded funds (ETFs) of Mexican stocks listed in the US suffered double-digit losses. The iShares MSCI Mexico ETF (EWW) plunged 10.8%, marking its worst day since Monday, March 16, 2020, when global investors abandoned emerging market stocks for safe-haven assets amid fears of a related global recession. with COVID-19.

Leveraged ETFs in Mexican stocks also experienced significant declines. The Direxion Daily MSCI Mexico Bull 3X Shares (MEXX) plummeted 31%. It is seeing its lowest close since late October 2023.

The election results, which saw President Claudia Sheinbaum win approximately 60% of the vote, the highest in Mexico’s democratic history, triggered violent volatility in the Mexican peso and ETFs.

Consequences for the market

Goldman Sachs economists suggest that a Sheinbaum administration may not severely compromise macroeconomic stability, limit central bank independence, or significantly weaken the fiscal stance.

However, a Congress led by Morena could be reluctant to approve necessary reforms or adopt measures required to attract investment, take advantage of nearshoring opportunities and keep Mexico on a “fiscally disciplined path,” the firm said.

Sheinbaum’s legislative coalition comprises Morena, the Labor Party and the Ecologist Green Party of Mexico. Sheinbaum could secure a “supermajority” of two-thirds of the seats in Congress.

According to Mexican electoral sources, the Morena-PT-PVEM coalition is projected to win between 346 and 380 seats of the 500 in the Lower House.

In recent history in Latin America, left-wing parties have prioritized equality and social justice.

“These results give Ms. Sheinbaum a very strong mandate and strengthen Morena’s presence in central and local political power structures.”Goldman Sachs.

In February, the AMLO administration presented a large package of bills to Congress. Many bills involve constitutional revisions aimed at reshaping key institutions such as the Electoral Institute and the Supreme Court. They also weaken or eliminate autonomous agencies.

These proposals also include costly populist measures related to pensions and the minimum wage.

“Some bills are perceived as leading to institutional erosion and weakening of current checks and balances; and several are not seen as market friendly.”Goldman Sachs.

The main challenge for Sheinbaum will be to “strengthen market sentiment and provide a predictable and investment-friendly policy and regulatory framework. ” Disciplined budget management, progress on public security and effective management of state-owned enterprises are also crucial to preserving market sentiment and sovereign debt ratings.