We are in a summer lull and the Draghi fireworks will have to wait until autumn. By signalling their intention for rates to remain lower for longer as well as willingness to act when necessary, the ECB has bought some time to observe more data points and changes in economic conditions from the recent geopolitical developments and the efficacy of their outstanding policy actions and purchase programs.
In light of today’s interest rate decision from the European Central Bank (ECB) Tim Graf, head of macro strategy – Europe at State Street Global Markets, and David Furey, Portfolio Strategist, Fixed Income, Cash & Currency at State Street Global Advisors, offers their views.
The center-right (PP) was the winner of the elections, improving its relative majority by 14 seats when compared to last December elections, from 123 to 137.
The far-left (Unidos Podemos) didn't improve its position in terms of seats and lost in terms of number of votes. It remains the third party behind the center-left (PSOE) .
That's positive for Spanish risk and markets. Polls before the elections (and Exit polls) were suggesting a much stronger showing for the far-left, that didn’t materialise. Moreover, on the left front, the socialists (PSOE) have more seats than Podemos, so that any opposition from the left will be moderate. 10 year yields are dropping by over 10bp this morning.
More generally, the Spanish elections are a first indication of the contagion (or not) from Brexit. Traditional parties are in better shape than expected - Extremists momentum is not here anymore.
As such, Spanish elections suggest that the pundits suggesting that extremism is growing in Europe and will grow further after Brexit are being proved wrong, for now. There is "contagion in reverse” if anything, back towards traditional parties on the back of uncertainty. Brexit could actually act as a catalyst against Euroscepticism. The next key test is Italy, in October, as we discussed here. But on Italy it is interesting to note that the anti-system 5 Star Movement is now backtracking on criticisms about Europe.
Despite the better than expected outcome, the Spanish political situation is not clear or strong yet. If, as we expect, the center-right will be able at some point in the coming months to form a (minority) government, the latter will still not be an ideal or inherently stable situation, especially in light of a potential period of turmoil ahead at the European level. Besides, the Socialists will ask for current PM and leader of the PP Mariano Rajoy to resign in order to gain their support to the minority government – this is a condition that might require a long negotiations, given that Rajoy is the effective winner of these elections.
Giovanni Zanni - European Economics - Credit Suisse
Anais Boussie - European Economics - Credit Suisse
Credit Suisse Global Equity Research believes that two hedges on the potential knock-on impact of a UK EU exit are: buying Bonos relative to BTPs (Spanish relative to Italian bonds) or euro volatility (which has, unlike sterling volatility, remained range bound)