Mexico Stocks Drop on Congressional Gridlock Concern; Peso Gains

Mexican stocks fell as signs of U.S. economic weakness damped the outlook for the Latin American country’s exports and on concern its next president won’t have a majority in congress to pass legislative changes.

The benchmark IPC index of 35 Mexican companies declined 0.2 percent to 40,108.92 at the close of trading after rallying 2.9 percent last week to a record close of 40,199.55. The peso rose 0.2 percent to 13.3386 per dollar at 4 p.m. in Mexico City. Yields on peso bonds due in 2024 dropped four basis points, or 0.04 percentage point, to a record low closing level of 5.47 percent.

While Enrique Pena Nieto of the Institutional Revolutionary Party claimed victory last night, the second in command of his campaign said today his party’s coalition won’t get a majority in the nation’s Chamber of Deputies, making it harder to open up the state-controlled oil industry to more private investment and boost the formal job market and tax collection. Equities declined earlier after a U.S. manufacturing index unexpectedly dropped, damping the outlook for Mexico’s exports.

“It’s a bad figure that’s generating noise in the U.S. market and evidently the Mexican market as well,” said Jorge Lagunas, who oversees about $200 million in equities as a money manager at Mexico City-based Grupo Financiero Interacciones SA. “I hope the congress can be mature” and work across party lines to pass legislative initiatives, Lagunas said.

Peso’s Rally

The peso gained today after rising 3.8 percent last week, its best five-day performance since Dec. 2. The currency will advance by the end of the first half of next year to 12.91 per dollar, according to the median forecast of 20 analysts in a Bloomberg survey, a level last seen May 3.

“What could be the most important driver here is the fact that the valuation is still quite cheap,” Siobhan Morden, head of Latin American fixed-income strategy at Jefferies Group Inc., said by phone from New York. “It allows you to kind of shrug off or downplay” the U.S. data and concern that Pena Nieto may not have a majority in Congress to pass changes, she said.

The currency earlier dropped as much as 0.7 percent after the Institute for Supply Management’s U.S. factory index fell to 49.7 in June from 53.5 a month earlier, with readings less than 50 signaling contraction. The median forecast of economists surveyed by Bloomberg was for a decrease to 52. Mexico sends 80 percent of its exports to its northern neighbor.

The extra yield investors demand to own Mexican government dollar bonds over U.S. Treasuries widened four basis points, or 0.04 percentage point, to 206 basis points today, according to JPMorgan Chase & Co.’s EMBI Global index.

Congressional Seats

With more than 90 percent of the votes counted, Pena Nieto’s PRI and the allied Green Party will have about 241 lawmakers in the 500-seat lower house, said Carlos Ramirez Marin, the second in command of Pena Nieto’s campaign.

“We’ll have to work a lot in the construction of consensus,” Ramirez Marin, a PRI lawmaker, said in a telephone interview from Mexico City.

A two-thirds majority is necessary to amend the constitution, a step required to loosen Petroleos Mexicanos’s control over oil production.

Mexico’s ruling National Action Party favors opening the nation’s energy sector and will support “reforms that are in the best benefit of the country regardless of who proposes them,” Senator Ruben Camarillo said today in a phone interview.

Pena Nieto won 37.8 percent, topping 31.9 percent for Andres Manuel Lopez Obrador of the Democratic Revolution Party, according to preliminary results from the nation’s electoral authority. Josefina Vazquez Mota of the ruling National Action Party, or PAN, gained 25.5 percent of the vote.

PRI Optimism

Pena Nieto said at an event today in Mexico City that he is “convinced” he will reach an agreement on Mexico’s energy industry with opposition parties in Congress.

He had maintained a lead throughout the campaign, buoyed by pledges to boost salaries held back by economic growth that averaged 1.8 percent a year, half the rate of Brazil, since Calderon took office in 2006. Pena Nieto also promised to turn the tide in a drug war blamed for more than 47,000 deaths under Calderon’s administration.

“The way Pena Nieto thinks is much more pro-market” than Lopez Obrador is, Claudio Irigoyen, head of Latin America fixed-income and foreign-exchange strategy at Bank of America Corp., said by phone from New York.

Supporters of Lopez Obrador, a former Mexico City mayor who has opposed more private investment in the oil industry, shut down the capital’s main business boulevard for weeks after the last presidential election, claiming the victory by Calderon was marred by fraud.

Speaking to supporters last night in the capital, Lopez Obrador said there isn’t enough information for him to decide what his position will be after yesterday’s vote. He said in a televised message that his campaign won’t act irresponsibly. Calderon congratulated Pena Nieto last night in a televised address and called on the nation to respect the election results. He said he would work with Pena Nieto.

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