Spain – Podemos frighten financial markets

Focus: Spain formation of government, EZ Industry Production

Spain – Podemos frighten financial markets

Following Spain's election last week, the Social Democrats (with the strongest vote) and the left-wing citizens movement Podemos signed a provisional coalition agreement this week. However, both parties still lack another 20 seats for a majority in parliament. The goal is therefore to win smaller regional parties for cooperation.

Due to Podemos' extreme political positions, the financial markets have already reacted skeptically to the agreement this week, as a result of which the general risk appetite for peripheral Eurozone government bonds has slackened. It remains to be seen whether a government will be formed and, if so, what influence Podemos as a junior partner would have on the government program. In essence, Podemos wants to expand government spending and partially reverse the structural reforms that have boosted Spain's growth in recent years. However, with a public debt ratio of 96.7% of GDP and a structural deficit of 3.1%, Spain has no room for maneuver within the Maastricht framework to increase public spending. On the contrary, Spain would have to reduce its structural deficit continuously in the coming years. Against this background, we believe that further moderate increases in risk premiums for Spanish government bonds in the coming weeks are possible. As has already been shown, this could also have a negative impact on Italian government bonds for the time being.

Eurozone – Turnaround in industrial sentiment?

A first flash estimate of the industry sentiment for the Eurozone, Germany and France for November will be released next week (November 22). In October, the survey values stabilized at multi-year lows.

During the last few weeks, some political uncertainty factors have calmed down (e.g. hard Brexit, trade conflict). At the end of October, the expectation component of the ifo index had already risen for the first time since March of this year. We therefore also expect industrial sentiment in the Eurozone to rise slightly in November, at least from its most recent very low levels. Due to the profound structural problems of the automotive sector and the unresolved Brexit question, however, we expect only a subdued recovery of Eurozone industry in the coming months.

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