WHAT TO WATCH: New Spain Vote No Guarantee Deadlock Will End
(Bloomberg) -- Opinion polls suggest Spanish elections this week will once again provide no clear winner. Leftist political grouping Podemos may take second place, suggesting a number of outcomes are still possible, analysts say.
- While an uncertain outcome is widely expected, the makeup of any eventual government could spur a widening in bond spreads, especially as Spain will go to the polls just days after the U.K. referendum on EU membership, they add
WHO’S WHO?
- The People’s Party or Partido Popular (PP) came first in the last election in 2015 but its share of seats fell to 123 from 186; while the party’s standing has been wracked by a series of scandals, it retains pole position in recent voter surveys with 120 seats (30.2%) in an El Periodico survey and 30% on avg in last 5 polls
- The Socialist party (PSOE), which took second place in December with 90 seats has been pushed into third place in recent polls
- Anti-establishment party Podemos challenging the Socialists’ monopoly over progressive voters in the 2015 election; after talks to form a govt with other parties came to nothing, it formed an alliance with Izquierda Unida; the combined Unidos Podemos (UP) is polling second with 24.9% compared to 71 seats last time around
- A Metroscopia poll published in El Pais suggests a PSOE and Podemos coalition would have 175 seats, one short of majority, while a Sigma Dos poll published in El Mundo says they would have 170 in any coalition
- Newly emergent pro-market party Ciudadanos is in fourth place, polling close to the 13.9% percentage it secured at the vote in December
WHAT’S NEXT?
- Voting takes place on June 26; polls close at 8pm and an exit poll is due shortly after
- The new parliament is likely to be formed by July 21 as it has to be convened within 25 days of the vote; after that, the king will nominate a candidate for PM
- If nominee doesn’t get an absolute majority, a second vote will be held 48 hours later where only a simple majority is needed
- After that, congress has two months to elect a PM before new elections would need to be called
- The European Commission will decide on whether to sanction Spain for breaching budget limits in July
WHAT’S THE LIKELY OUTCOME?
- Teneo analyst Antonio Barroso says the probability of a PP- led minority government is 55% and sees a 30% likelihood of a left-wing government; the latter relies on the PSOE and UP groups having enough seats between them to not need the support of pro-independence parties
- UBS analysts including Reinhard Cluse write there may be greater incentives to form a coalition and avoid a hung parliament this time, but the outcome still seems unclear
- A left coalition does seem possible this time around, they say
- Berenberg’s Holger Schmieding sees a 25% likelihood of a left-left government, which he says would probably shy away from a full confrontation with the EU about fiscal policy
- JPMorgan analysts Gianluca Salford and Aditya Chordia still expect the PP to be part of the next government as their central case, either as part of a grand coalition or minority government with external support
- Barclays analysts Apolline Menut and Antonio Garcia Pascual see a minority government before the summer break as the most likely outcome, with one led by the PP more likely than one led by the socialist PSOE, likely leading to policy inertia
- UniCredit analysts including Luca Cazzulani say the least likely outcome is an alliance of Podemos, PSOE and Ciudadanos as prior attempts didn’t succeed
- If PSOE comes in third, it wouldn’t be willing to join Podemos as a junior coalition partner and run the risk of being permanently overshadowed by the movement
HOW TO TRADE IT?
- UBS analysts say Spain sovereign bond spreads may tighten on a grand coalition, with the 10Y sector narrowing by as much as 25bps vs Germany and 15bps vs Italy; after the initial phase, much would depend on the specifics of any budgetary agreement
- A left-wing coalition will likely drive a widening of spreads, with the 10Y moving 50bp or so wider vs bunds and 30bps wider vs Italy, although much of that may take place before the vote
- Barclays’s Menut and Garcia Pascual say Spanish assets will continue to underperform relative to what economic fundamentals would justify in the event of a minority govt; that said, expect Italy’s sovereign risk profile to worsen relative to Spain’s ahead of the former’s referendum on the constitutional reform in October, suggesting spreads could tighten
- UniCredit analysts say a result similar to the current parliament won’t come as a surprise so don’t see much room for SPGB underperformance ahead of vote
- On the medium-term horizon, if the political situation improves, better macro fundamentals speak for further tightening of SPGBs vs BTPs; if Podemos make a strong showing, expect political uncertainty to weigh on SPGBs
- Rabobank analysts say shorting Spanish bonds vs Italy appeals as a cautious tactical play ahead of the U.K. referendum on Thursday as SPGBs may underperform as the market’s focus shifts to the Spanish vote
Alert:
HALISTER1Source: BFW (Bloomberg First Word)
People Aditya Chordia (JPMorgan Chase & Co)
Antonio Barroso (Teneo Intelligence)
Antonio Garcia Pascual (Barclays PLC)
Apolline Menut (Barclays PLC)
Gianluca Salford (JPMorgan Chase & Co)
To de-activate this alert, click
hereUUID: 7947283