Argentine bonds and stocks tumbled on Monday after left-of-center Economy Minister Sergio Massa unexpectedly won the most votes in Sunday’s presidential election, pushing the race to a runoff against far-right libertarian Javier Milei, who had been tipped to fare better.

The country’s sovereign bonds were down between 8% and 11% in early trading, while stocks also plunged. Shares in YPF, the nation’s biggest energy company, fell more than 10%, while cement producer Loma Negra tumbled by more than 13%. The banks were the big winners, as well as Mirgor, a maker of cell phones and other technologies.

This was the initial reaction to an election that knocked the market favorite — right-of-center Patricia Bullrich and her Juntos por el Cambio coalition — out of the race.

Massa won 37% of the votes, bouncing back from a drubbing in the August 13 all-party primaries that had left his Peronist Party in third place at 27%. By comparison, Milei held steady with 30% of the votes in Sunday’s ballot, while Bullrich slid to four percentage points to 24%.

Milei failed to pick up any additional votes after the primaries while Massa added 10 percentage points, Sebastián Maril, CEO of financial research company and advisory firm Latam Advisors, told LatinFinance. “This was a surprise,” he said.

The results, according to Maril, have left the markets without the Milei-Bullrich ballotage that they were hoping for, and instead now they have the “worst scenario,” which is Massa versus Milei.

Massa, long known as a centrist and pro-market politician, had raised huge expectations when he was appointed economy minister in August last year, leading to a surge in asset prices. But that rally soon petered out as he failed to dismantle the currency, price and trade controls implemented by his political party, as well as the heavy public spending that combined with a severe drought this year have pushed the country deeper into a financial crisis. Inflation is touching 140%, net international reserves are at less than zero, the economy in recession and public debt is rising.

Felipe Noguera, a political consultant in Buenos Aires, said ahead of the vote that a good performance by Massa would be shocking, given that the economy “is in such a mess.”

But the 51-year-old former lawmaker managed to pull off the seemingly impossible, emerging from Sunday’s election with chances of becoming president on December 10.

Massa will have to face off against Milei, a flamboyant free-marketer how has yet to win the nod of investors for his aggressive economic proposals like shuttering the central bank and dollarizing the economy.

José Ignacio Bano, country manager of the IOL Invertironline brokerage in Argentina, said that ahead of the election investors had expected the vote would bring a shift to the right and a more pro-market government, leading to a rally over the past few weeks.

“When this didn’t happen or it became less clear, there was a correction,” he said.

WHAT NOW?

With the election pared down to two candidates, the race shifts to a battle to win over the people who cast their ballots for the three losers in the election, in particular Bullrich.

Latam Advisors’ Maril said that Massa could be the best placed to do this.

“Massa is very astute,” Maril said. “He’s a chameleon. He knows what suits him and what suits the country. Massa is the type of candidate who is capable of providing pro-market signals for the country,” something that President Alberto Fernández and Vice President Cristina Fernández de Kirchner have been unable to do, he added.

This may help bolster asset prices, at least in the near term, Maril said. If Massa wins the presidency, the markets are going to react regardless. That’s because the country’s bonds and stocks have been battered for so long that any sign of optimism will spur a rise in asset prices, he said.

A key sign for whether this could happen will come with Massa’s announcement of who he will appoint as economy minister. A left-leaning pick would lead to a decline in asset prices, while a pro-market choice would lead to a rise, Maril said.

Any decisions that Massa makes, however, will be designed to bolster his chances to win the runoff, such as when on Sunday night he called for those who voted for the three losers to now back him. He will focus on making decisions that will win him more votes, Maril said.

“He could announce a few fixes to capture the votes he needs to win, but he won’t make big announcements that could hurt his candidacy, such as a devaluation,” he said.

STABLE EXCHANGE RATE

There had been an expectation that the official exchange rate would plunge if Massa had fared worse in the election or got knocked out. That expectation led the black-market rate to surpass ARS1,000 per dollar ahead of the vote, down from ARS346 per dollar at the start of this year. The pressure on the peso led to a 22% devaluation after the August primaries, taking the official rate to ARS350 per dollar. The central bank is keeping the official rate at this level until the election is over.

There had been expectations that the official rate would tumble to below ARS800 per dollar after the election, but with Massa ahead that appears less likely.

“With Massa now having greater chances, it is expected that there will be more efforts to control the official exchange rate,” Bano said. “That is why investors who had bet that the official exchange rates would tumble are dismantling their positions. This is leading to a decline in the dollar-linked bonds.”

Another expectation is that there will be less control over inflation, which led to a surge of up to 8% in inflation-linked bonds. Inflation is expected to surpass 180% this year, according to a survey of economists by the central bank.

ALL EARS

Investors will also pay close attention to who Milei picks as his candidate for economy minister.

Milei is campaigning for a dramatic shift in how the economy is run. He proposes “exploding the system in a positive way because it doesn’t work, and he is going to come up with something else,” said Noguera, the political analyst. “It is a high-risk gamble.”

Massa, on the other hand, will seek to “muddle through” the crisis, he added.

This choice of styles could lead to a tight race. Based on a crude calculation of who could win the 34% or so of the votes that went to the three losers, Milei could get 54% by capturing Bullrich’s votes. But many of those who voted for Bullrich are “very scared of Milei” and “detest Massa,” and so they could cast null votes, Maril said. “The runoff should be more even that we expect.”

Norberto Sosa, a director of the IEB Invertir en Bolsa brokerage in Buenos Aires, said Massa appears to be projecting himself as the winner, speaking after the election results to the public as if he were a president, a statesman.

Massa also has the nod over Milei in the markets as the person who is in the best position to “disarm the economic bomb left by the current administration,” such as the currency controls, Sosa said in an interview. “Even those against Massa say that the most capable of doing this in the short term with the least damage possible is Massa, who armed it, and for his handling of the streets and his political capacity.”

This could prove beneficial for the economy in the short term, making the depressed prices of Argentina’s hard-dollar bonds alluring.

“We think the prices of the hard-dollar bonds are attractive,” Sosa said. “We are recommending them.”