Spanish markets decline on coalition concerns

Summary:

• Socialists (PSOE) and Unidas Podemos reached an agreement to forge a coalition government
• Both parties lost some seats after Sunday’s elections while populist VOX gained the most becoming the third political force
• IBEX declined, Spanish bond yields climbed on the news on a new government

After less than 48 hours following snap elections held on Sunday, an agreement to form a coalition government in Spain was signed on Monday by Socialists and Unidas Podemos. Pablo Iglesias, the Unidas Podemos leader, is expected to become deputy prime minister once the deal comes to fruition. Let us remind that Spanish political parties were unable to strike any agreement to form a new government following general elections held in April, hence yesterday’s announcement seems to be yet more surprising. However, it is not the end of the Spanish saga as Socialists and Unidas Podemos have no sufficient seats to get a majority in a 350-seat parliament. In the wake of the Sunday’s vote the PSOE lost 3 seats and right now it has 120 seats, while Unidas Podemos took 35 seats, falling from 42 seats it won in April. The populist VOX turned out to be the largest winner of the Sunday’s elections gaining as much as 52 seats and becoming the third political force there. 

A response from financial markets regarding yesterday’s revelations out of there was bearish as both PSOE and Unidas Podemos are not perceived to be market friendly. IBEX (SPA35) lost 0.9% on Tuesday while other markets in Europe gained. Bond yields also kept rising on the news with 10Y yield reaching its highest level since July. The euro was barely moved and revelations from Spain are unlikely to drive the common currency in a sustainable manner. Looking ahead, Socialists and far-left Unidas Podemos are expected to try to get other smaller parties on board to reach a required majority in order to be able to pass bills through the parliament. This could be also important question for markets. However, given a terrible result reached by market-friendly Ciudadanos (it got also 10 seats), even getting it on board is unlikely to be a bullish signal for markets.

SPA35 saw on Monday its largest decline since the beginning of October. Source: xStation5