Spanish Elections | Political Destabilization and Economic Implications

Spain’s political environment post Sunday’s National Elections has been downgraded to unstable as it was forecasted prior to the 20th of December Elections day. The political scheme now in Spain is consider fragile and it seems it is closing towards the same path as Greece and Portugal, that is into political destabilization.

Our pre-elections analysis, covering the Spanish topic in brief, EURUSD in light of Macroeconomics and Geopolitics

Spain’s People Party (PP) with Mariano Rajoy, did won the elections yet lost the ability to form a government due to collecting only 123 seats, short 53 seats of 176 seats required to obtain the necessary majority. While PP Party is expected to make a coalition with Centre-Right Ciudadanos political party, still both parties fall short of getting 176 seats. Ciudadanos collected 40 seats and thus the sum of both parties equals to 163 seats which still not enough to form a stable Government. On the other side, Left –wing PSOE and Podemos collected 90 and 69 seats respectively, yet still short of obtaining majority after both parties together sum 159 seats against the 176 required threshold.

At current stage, PP party took the directive as per constitution to create a government scheme, yet political analysts are holding low odds Mariano Rajoy will succeed in forming one. While political uncertainty seems that will remain, odds for a potential case of seeing the Spanish 10 year Yield to continue higher currently at 1.779 towards the 3.000 – 4.000 mark are increasing.

Spanish yields2


Chart Source

Odds for a potential case of seeing the Spanish 10 year Yield to continue higher increase even more if we correlate the Spanish 10 Years Yields with Spanish IBEX Index.

Spanish yieldsIBEX

Chart Source

As projected via the above diagram, Spanish Yields are inverse correlated with Spanish IBEX index and while our Technical Analysis in Spanish IBEX Index shows more room to extend lower, we assume that as long as the political uncertainty remains, both instruments will extend against the Spanish Economy.

At this stage is safe to mention that Spain may need additional austerity measures in the near feature in the case the political uncertainty, later in 2016, resolves in favor of the political parties which initially introduced the austerity program and post Spanish IBEX Index and 10 Year Yields have moved enough against the Spanish economy. In the contrary, if we were to assume that the political uncertainty resolves in favor of the anti-austerity political parties like Podemos and PSOE, the Spanish economy might get another strong smash like the one it took during the 2007 period, when crisis initially begun.

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Safe Trading,

Spiridon C. Dalietos