WHAT TO WATCH: SPGB Outlook Murky as Rajoy Likely to Lose Votes
Source: BFW (Bloomberg First Word)
People
Mariano Rajoy Brey (Kingdom of Spain)
Elia Lattuga (UniCredit SpA)
Federico Santi (Eurasia Group)
Kim Liu (ABN AMRO Group NV)
Ruben Segura-Cayuela (Merrill Lynch International)
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UUID: 7947283
(Bloomberg) -- Acting Spanish PM Mariano Rajoy faces a confidence vote today, which he is widely expected to lose even after signing a pact with centrist party Ciudadanos.
Alert: HALISTER1- Ongoing political uncertainty alongside new SPGB supply and uncertainty over ECB’s next steps could re-widen spreads, analysts say
- The People’s Party or Partido Popular (PP) came first again and its share of seats rose to 137 from 123 at the 2015 election
- Party leader Rajoy says voters have made it clear they want his party to lead government
- The Socialist party (PSOE) took second place but lost five seats relative to its December result, taking 85 seats
- Party leader Pedro Sanchez said his MPs will vote against Rajoy, and that the acting PM is politically blackmailing other parties by setting an unfavorable possible date for fresh elections
- Anti-establishment party Podemos formed an alliance with Izquierda Unida; the combined Unidos Podemos (UP) had been polling at second place and secured 71 seats
- Newly emerged pro-market party Ciudadanos came in fourth, losing 8 seats relative to December
- The party signed a pact with PP to pool their votes; even with the support of an MP from the Canary Islands, they are 6 votes short of a majority in the 350-seat chamber
- Voting takes place tonight ~7pm CET
- If Rajoy doesn’t get an absolute majority, a second vote will be held 48 hours later, where only a simple majority is needed
- If Rajoy loses both votes, congress has two months to elect a PM before new elections would need to be called, risking a new vote on Christmas Day
- Spain has until Oct. 15 to take action on budget deficits
- BofAML analysts including Ruben Segura-Cayuela say risk of a third election has increased given they don’t think PSOE will abstain this week and don’t think a government will be formed
- Any major action soon is unlikely given end-September regional elections and because it’s unclear what could sway the Socialists
- Commerzbank and DZ Bank analysts agree there’s little chance Rajoy will form a government in coming days
- Eurasia analyst Federico Santi believes a third election or a Socialist-led government remain possible though not the most probable outcome
- Rajoy will probably lose this week’s votes as the Ciudadanos-PP deal won’t be enough to alter PSOE’s position, while the party’s leader is unlikely to back abstentions in the vote as could lead to him being ousted, Santi adds
- Societe Generale economists see little chance PP will get backing from regionalist parties that hold 25 seats, making PSOE abstention and a minority government the only option; likelihood of this outcome has increased, they say
- Even if enough PSOE MPs abstain, Rajoy’s government would be extremely fragile and the 2017 budget vote will be challenging; new elections in 2017 would be possible
- UniCredit analysts see potential for a last-minute agreement or for some PSOE MPs to challenge Sanchez and defect to avoid new elections
- Rabobank analysts say best-case scenario is Spain gains a minority government this week, though this would leave questions over the new administration’s legislative efficiency going forward
- SocGen analysts say Bonos remain the “least bad” choice among peripherals; while yields near historic lows and tight spreads make them vulnerable to any faux pas, recommend positioning for compression in 2021 SPGBs vs BTPs
- Rabobank analysts say with Spain’s 10Y spread over Germany having rallied more than 60bps and close to the lowest level since end-2015, all potential upside from this week’s confidence motions appears to be priced
- Recommend waiting for any widening before entering amid potential risk triggers ahead both in periphery and beyond
- Commerzbank favors tactically reducing Spanish risk, looking for better entry levels again after confidence votes and before pending supply
- ABN Amro analysts including Kim Liu say spreads could widen if ECB doesn’t remove capital key for QE program and focus turns to political risks, though unlikely to widen as much as they did around U.K.’s Brexit vote; forecast 10Y SPGBs at 120bps by end-2016
- UniCredit analyst Elia Lattuga says supply, political risks and possibility the ECB won’t provide clear signal on next steps this month justify a more cautious periphery stance
Source: BFW (Bloomberg First Word)
People
Mariano Rajoy Brey (Kingdom of Spain)
Elia Lattuga (UniCredit SpA)
Federico Santi (Eurasia Group)
Kim Liu (ABN AMRO Group NV)
Ruben Segura-Cayuela (Merrill Lynch International)
To de-activate this alert, click here
UUID: 7947283