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Wall Street Is Wary of Being Burned by the ‘Milei Trade’

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It’s going to be a pivotal moment for the Milei trade — and nobody wants to be caught on the wrong side of it again.

The frantic selling that hammered Argentina’s markets after President Javier Milei’s party suffered a defeat at the polls last month has left global investors bracing for another potential hit in the wake of the legislative elections on Sunday.

Money managers and strategists say that if his La Libertad Avanza coalition can secure one-third of the seats in Congress, markets could see a bounce-back. But even with that low bar — before last month’s loss, expectations were for a higher number — firms including Morgan Stanley and UBS Group AG are warning that there’s significant downside risk: A weaker showing will likely be seen as imperiling his economic-reform agenda and the flood of rescue cash the US has injected to bolster the nation’s currency.

“If elections go really well and his party gets the one-third, I think Argentina will rally — but I don’t want to get caught in a downside scenario,” said Ray Zucaro, chief investment officer at RVX Asset Management LLC in Miami. “I’d rather be neutral, not having a large position.”

Argentina’s markets have steadied some since the Trump administration swooped in to buy the peso and extended a $20 billion lifeline to prevent Milei from facing a currency crisis ahead of the election.

The country’s dollar bonds gained on Friday, with notes due in 2035 up by more than half a cent to almost 57 cents on the dollar, according to indicative pricing data compiled by Bloomberg.

The currency, meanwhile, fell 0.9% to close at 1,492 per dollar — less than a peso away from the weakest limit of the trading band in its last session before the vote.

But memories of the sharp losses last month, which followed a drubbing for Milei’s party in a Buenos Aires vote, are keeping investors on edge.

The episode forced Wall Street banks to unwind bullish calls and rattled global investors who once rushed in on bets that the libertarian economist’s push to slash spending and regulations would turn around a country that’s been upended by sky-high inflation and sovereign debt defaults for decades.

That has turned the legislative elections into a highly-anticipated test of whether Milei will be able to continue to push through his agenda, which has shown success in bringing down inflation but has upset voters by cutting deeply into government programs without delivering the promised revival. He has also been dogged by a corruption scandal surrounding his inner circle that’s undermined his image as a reformer.

The key issue will be whether Milei can maintain sufficient support in the legislature to veto any moves by the Peronist opposition to roll back his agenda. Investors will also be watching for signs of whether the outcome will prompt him to take a more conciliatory approach toward his political foes.

“The real test lies in Milei’s post-election strategy,” JPMorgan Chase & Co. economist Diego Pereira wrote in a note to clients. He said a narrative of “national defeat” will likely take hold if Milei secures around 31%-32% of votes and suffers losses across most provinces.

“Possessing a ‘veto third’ in Congress is no substitute for the alliances required to enact critical macroeconomic reforms; a shift from combative rhetoric to pragmatic governance is essential,” he said.

Pedro Quintanilla-Dieck, a strategist at UBS, said traders are “not expecting a strong result” for Milei at the polls, estimating that they’re pegging his showing “in the low 30s.”

There is also significant doubt about whether Argentina can continue to keep the current trading band for the peso, which is widely seen as overvalued. The government has spent billions of dollars buying it to prop it up as global investors pulled out and nervous Argentines shifted their savings into the US currency, anticipating the president is just delaying another devaluation until after the election.

Those worries were fueled by comments from US President Donald Trump that indicated his administration would cut off its financial support if Milei’s agenda is defeated.

Morgan Stanley has flagged a potential “muddle through” scenario in which Milei’s party obtains 30–35% of votes. That outcome — not as positive as Milei getting closer to 40% — would likely maintain US support, though progress on his agenda could be slow. Its takeaway to clients: Don’t place significant directional bets before the election.

At investment firm Gramercy Funds Management, Belinda Hill has been adopting a similarly cautious approach.

“I don’t think anyone can tell what will happen at the vote,” said Hill, a portfolio manager at the West Palm Beach, Florida-based fund. “We’re more focused on visibility around Milei building a coalition post the election and what policies will come for us to determine the right positioning.”

(Updates with the peso’s closing price, bond move on sixth paragraph.)