Benzinga - by Kenneth Rapoza, Benzinga Contributor.
Following a recent trip to Buenos Aires, America’s “Iron Man” Elon Musk said investors should put money to work in Argentina.
Is he right?
For starters, the market looks to be in a risk-on moment. Argentina is pretty risky, so the risk-on trend is Argentina’s friend.
Global equities reached an inflection point on April 19. That was when Iran signaled that it was not going to climb the escalatory ladder with Israel over Tel Aviv’s response to the October 7 terrorist attacks by Hamas against civilians attending a music festival not far from the Gaza strip.
That decision by Iran put a cap on oil prices and was bullish for stocks. Oil futures are down from their April 5 peak of $86.91. Without a reason to return oil futures to their annual highs (despite the May 8 rise due to inventory declines), consensus has been that the Federal overnight rate maximum of 5.5% will not go higher. The Fed monetary policy committee opted to keep rates unchanged on May 1. Their projections are for interest rates to decline to 3.9% in 2025.
Back to Argentina.
Conservative investors rarely like chasing a great story. Argentina is one of those stories. The Relative Strength Index for Argentina, which measures stock price momentum, is showing the Global X MSCI Argentina (ARCA: ARGT) ETF overbought at 79. Anything above 70 signals an overbought situation.
Is Argentina Worth Chasing? Since his landslide victory in November, President Javier Milei, has begun tax reforms and reductions in government spending that led the central bank to cut its crazy high 50% interest rate again on March 2. There have been five rate cuts since his election.
“Milei is cutting taxes, rolling back regulatory restraints on businesses, and all that is good for that market,” said Vladimir Signorelli, founder of Bretton Woods Research, a macro investing forecaster in New Jersey. “Right now, I don’t want to chase ARGT. But if there is a sell off, I’d consider dipping in,” he said, adding the caveat that buying depends on where Milei stands politically.
Milei’s “chainsaw” rhetoric – where he famously takes a chainsaw out in public as a symbol of what he plans to do with government spending – is not always razor-sharp. In January, a court killed his labor reform plans which would have made it easier to cut some deadweight in Argentina state owned enterprises and in the private sector.
Labor reform failures this year had no impact on the ARGT ETF, which is up 24% as of market close on May 8 compared to 8.8% for the S&P 500 and 5.1% for the iShares MSCI Emerging Markets Index (ARCA: EEM).
“Maybe the Argentina sell-off news comes along the lines of Milei having to water down more of his policies,” Signorelli said. “ARGT has such high momentum right now, it can easily be knocked off its pedestal by something geopolitical like oil hitting $100 as that could force the Fed to raise rates. And if the U.S. slows, that’s a headwind for ARGT.”
There are some fears that an incursion into Rafah by Israel could spook the market near-term. A full-scale invasion could lead Iran-backed Hezbollah to get involved from Lebanon on the northern Israeli border.
Moreover, hawkish remarks on Wednesday from Minneapolis Fed President Neel Kashkari and Boston Fed President Susan Collins gave the algorithm trades at the quant funds a reason to sell. Kashkari said rates will remain at current levels and could go higher if inflation – like oil and gas prices – remains high.
This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.
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