WHAT TO WATCH: Spain Assets Buoyed by Vote But Doubts Persist
(Bloomberg) -- Spanish assets book gains after acting PM Rajoy’s PP party consolidated its position and leftist grouping Podemos trailed in third place in Sunday’s election.
- That said, all parties fell short of the 176 seats needed to form a majority and only a grand coalition of the PP and traditional opposition PSOE would surpass that threshold, suggesting negotiations may be drawn out, analysts say
- Spain 10Y outperforms, with yield falling 19bps to 1.43%; spread vs BTPs turned negative first time since July 2015; Ibex 35 falls 1.45%, while EuroStoxx is 2.11% lower and FTSE MIB 2.40% lower, led by losses in its banking sector
WHO’S WHO?
- 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
- The Socialist party (PSOE), which had been polling third in opinion polls took second place; but it lost five seats relative to its December result, taking 85 seats
- Party spokesman Antonio Hernando says will vote against Rajoy as PM; PP should seek support among like-minded parties
- Anti-establishment party Podemos formed an alliance with Izquierda Unida; the combined Unidos Podemos (UP) had been polling second place; the combined group secured 71 seats
- Newly emerged pro-market party Ciudadanos came in fourth, losing 8 seats relative to December; the party’s leader Albert Rivera says he won’t support a government led by Rajoy; he will sit down with PP, Socialists to discuss major pieces of legislation
WHAT’S NEXT?
- Acting PM Mariano Rajoy says PP needs PSOE for “fundamental issues;” says it’s time for dialog
- The new parliament is likely to be formed by July 21 as it has to be convened within 25 days of the vote
- The king will nominate a candidate for PM after discussions with the parties
- If nominee doesn’t get an absolute majority, a second vote will be held 48 hours later where only a simple majority is needed
- Congress has to elect a PM within two months from the first vote; if it fails, new elections will be called
- The EC will decide on whether to sanction Spain for breaching budget limits in July
WHAT’S THE LIKELY OUTCOME?
- PSOE’s performance was its worst since the early 1980s and leader Pedro Sanchez may be challenged over coming weeks; PM Rajoy’s leadership also likely to be questioned, especially if he needs to step down to secure a deal with Ciudadanos or the PSOE, SocGen analyst Yvan Mamalet writes
- The worst outcome of a govt involving Podemos is off the table; see a 60% likelihood of a PP minority govt supported by PSOE and Ciudadanos, but only after lengthy negotiations, Eurasia’s Federico Santo writes
- While PP, won the elections by a wider margin than in December it may find it difficult to secure additional seats elsewhere; PSOE remains the king maker, BofAML analysts Ruben Segura Cayuela and Gilles Moec write in client note
- Negotiations could be long and all potential permutations of parties could be discussed, including those that markets might not like, they add
- A new government more likely than a third round of elections, with a minority govt the most likely option, led by either the PP party or by a PSOE alliance with Unidos Podemos, Barclays analysts Apolline Menut and Antonio Garcia Pascual write
- UniCredit analysts Luca Cazzulani and Edoardo Campanella say baseline scenario involves a minority government between the PP and Ciudadanos, with external support from the PSOE
- ABN Amro says still likely Spain will miss its budget deficit target again this year and next and the country will be fined by the EC, especially as a soft approach could fuel euroskeptic sentiment in some core countries; any fine is likely to be bearable for the Spanish economy
HOW TO TRADE IT?
- A grand coalition could see spreads tighten 25bps vs Germany, 15bps vs Italy while a center right govt could see them tighten 35bps and 20bps respectively, UBS analysts including Bosco Ojeda favor say
- Either scenario would push local cyclical stocks, such as Hispania, NH Hotels, Melia, Indra, AENA, Abertis or local banks
- But perceived stability of coalition would be crucial; a hung parliament and repeat elections would see spreads widen and weigh on stocks; would favor Telefonica, Euskaltel, Grifols on such an eventuality
- The relief spread compression of this morning probably won’t last for long, analysts Aline Schuiling and Kim Liu write
- SPGBs vulnerable to additional bouts of risk aversion on U.K. Brexit talks or the Italian vote later this year, possibly as other anti-establishments groups demand referendums; ECB QE will only partially offset any widening
- SocGen’s Mamalet say a significant widening in bond yields wouldn’t be surprising given the current EU political crisis in the wake of Brexit
- And BofAML analysts Ruben Segura-Cayuela and Gilles Moec say investor sentiment may sour over coming weeks; while QE may be enough to calm fixed-income markets that may not necessarily be the case when it comes to equities, they say in client note
- Close 5Y Italy vs Spain on today’s moves
- If negotiations to form a new government move ahead, UniCredit sees room for Spain to keep outperforming Italy; the 4Y and the 30Y area of the Spanish curve offer better value
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Albert Rivera (Autonomous Community of Catalonia)
Antonio Garcia Pascual (Barclays PLC)
Apolline Menut (Barclays PLC)
Edoardo Campanella (UniCredit SpA)
Gilles Moec (Merrill Lynch International)
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