MARKETS ARE UP BUT WILL REMAIN VOLATILE

UNCLAS MEXICO 003715

SIPDIS

SENSITIVE
SIPDIS

STATE FOR WHA/MEX, WHA/EPSC, EB/IFD, AND EB/EPPD
STATE PASS USAID FOR LAC:MARK CARRATO
PASS USTR FOR JOHN MELLE
TREASURY FOR IA MEXICO DESK: JASPER HOEK
COMMERCE FOR ITA/MAC/NAFTA: ANDREW RUDMAN

E.O. 12958: N/A
TAGS: ECON EFIN EINV PGOV MX
SUBJECT: MARKETS ARE UP BUT WILL REMAIN VOLATILE

REF: MEXICO 3672


1. (SBU) Summary: Following a rough day Wednesday when the
Mexican stock market dropped 4.01 percent as a result of Wall
Street,s slide and temporary indications that Andres Manuel
Lopez Obrador (AMLO) was ahead in the official election
count, Mexican stocks and bonds have rallied today as Felipe
Calderon has taken the lead and appears poised to be declared
the winner by IFE. The Mexican stock market increased by
2.85 percent, and the yield on Mexico,s 10-year
peso-denominated bond has declined to 8.64 percent. The peso
has remained relatively stable at 11.2 pesos to the dollar.
Despite today,s rally, the likelihood of a protracted legal
challenge to the presidential election results will ensure
continued market volatility. End summary.


2. (SBU) Following AMLO,s press conference the morning of
July 6 in which he promised to contest the election results
through legal means, observers predict an extended challenge
that will likely last into August (Note: The electoral
tribunal must resolve any hearings on complaints by August
31). Octavio Gutierrez, Bancomer,s economic analyst,
expects that an AMLO legal challenge to a Calderon victory
would generate continued market volatility in the coming
weeks. He said the bank,s message to investors is to &wait
and see8 while relying on Mexico,s strong institutions and
macroeconomic fundamentals. We have heard similar
perspectives from other leading business figures.


3. (SBU) Despite elections uncertainty, we have no
indications at this point that investors plan to remove money
from Mexico. Alejandro Gomez Strozzi, Undersecretary of
Economy, said Mexico would receive USD 20 billion in foreign
direct investment by the end of the year, and he has seen no
movement of investor funds during the elections campaign or
since the vote. Financial analysts do not expect capital
flight, but rather reduced profits in the coming days.
Despite recent uncertainty, country risk has also remained
stable and even slightly improved.


4. (SBU) Comment: Mexico has landed in what many analysts
characterized as a near worst-case scenario, in which the
elections were initially too close to call and AMLO promises
to contest the results. Despite this scenario, Mexico,s
markets appear more stable than many would have predicted and
strengthened today with indications that Calderon would win
the election. Speculation is rife regarding what will happen
next. Domestic and external factors, including AMLO,s next
political steps, the length of his legal challenge, and
reactions of the international press, will determine the
extent of market volatility.


5. (SBU) Comment continued: In the immediate term, markets
are likely to remain relatively calm provided that AMLO
challenges the results exclusively though legal means (Note:
AMLO has called for a &public assembly8 meeting Saturday,
July 8 at 5pm at the Zocalo, Mexico City,s central square).
Looking further ahead, it is clear that whoever is ultimately
declared president will have won by the slimmest of margins.
A protracted legal dispute may well further erode the next
president,s mandate to govern. We will need to assess
carefully potential negative implications for implementing
needed economic reforms and maintaining investor confidence
over the longer-term.


Visit Mexico City's Classified Web Site at
http://www.state.sgov.gov/p/wha/mexicocity

GARZA