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UPDATE 2-Socialist surge in election spooks Peru's financial markets

(Recasts with currency’s closing price, adds market details and vote tally)

LONDON/LIMA, April 12 (Reuters) - Peru’s currency tumbled on Monday morning before recovering amid central bank intervention to end the day up a slight 0.1%, while the 2030 sovereign bond hit a more than seven-month low after socialist candidate Pedro Castillo took a shock lead in the first round of the country’s presidential election.

With over 80% of the vote tallied by Monday afternoon, leftist candidate Castillo looked to be facing a run-off against pro-business conservative Keiko Fujimori in a second-round vote in June.

While often politically turbulent, Peru has been one of the more steadfast and reliable markets in Latin America in recent years, attracting international money managers into its bonds and sol currency.

The sol dropped 2.1% at the open, but ended slightly up at 3,617/3,621 per dollar, central bank data showed. Peru’s 2030 euro-denominated sovereign bond fell 1.2 cents to its lowest level since late August 2020, according to Refinitiv data. Spreads - the risk premium over U.S. Treasuries - earlier widened out around 10 basis points, according to traders.

“We did not anticipate a scenario in which an extreme-left candidate, who just a week ago was printing below 5% of voting intention, managed to win the first round,” analysts at JPMorgan said in a note.

Castillo had tapped in to public anger which has been fired up in Peru over the last year.

The economy crashed to its hardest fall in three decades last year as the COVID-19 pandemic hammered the copper-rich country. Tough lockdowns failed to stem the spread, with Peru one of the hardest hit in the world per-capita.

Meanwhile, politicians have come under fire. President Martin Vizcarra, who had been popular, was impeached by Congress last year over allegations of corruption. His successor resigned shortly after, following deadly street protests.

“I would say it is negative for bonds overall as political volatility is here to stay in Peru,” said Nathalie Marshik, managing director emerging markets at Stifel, adding that Peru’s Congress would be fragmented after the election.

“The short-end (of the bond market) and belly has already sold off and I would expect more weakness,” although a plus point was that Peru does have a strong balance sheet.

The market volatility is also likely to be exacerbated after the sol last week scored its best weekly jump in over a decade as rising copper prices helped it bounce back from record lows the previous week.

“Castillo’s three (policy) pillars are pretty scary,” said Jupiter Asset Management’s Alejandro Arevalo. “He’s talking about nationalisation, about the government taking control of the economy.”

“He’s in favour of governments or revolutions like in Cuba, Ecuador, Venezuela, so it’s something that could bring significant volatility to the market.” (Reporting by Marc Jones, Tom Arnold in London and Maria Cervantes in Lima Editing by Susan Fenton and Matthew Lewis)

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