Fernando Delgado Garcia\u002c CFA  

Fernando_D (2320º) 

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Fernando_D
23:25 el 13 agosto 2015

The Market in the Summer. Spanish Strengths and Weaknesses

Through this blog that I begin today I will share my vision and analysis of financial markets. For my debut I chose to discuss the main drivers of market movements which I have followed throughout this summer focusing on an analysis of strengths and weaknesses of the Spanish economy, in the context of the dynamics of the Eurozone.

The central banks’ policies are among the main drivers of fixed-income performance. Quantitative easing policies have caused most assets’ prices to increase. Eventually, these policies will be reversed. Thus, we will want to know where to invest in a rising rates environment when the central banks remove their expansionary monetary policies. I will elaborate on this topic in future articles.

Although it seems the market has forgotten about Greece in the last few weeks it has been the hottest topic this summer. As Greece came closer to leave the Eurozone, with the populist in power and reticent to find an agreement with its creditors, the market perception of redenomination risk increased an the peripherial countries suffered considerably in comparison with the core ones. The Greek situation is still far from being solved. Negotiations for a third bailout have just ended with an agreement. From a longer perspective Greek economy still present remarkable imbalances, notably public debt to GDP.

In this first article I will discuss some influential aspects of the Spainish economy. It is doing better than the Euro area. It is growing at an annualized rate of 4.1%  vs. 1.5% (The Economist, Aug 8 th 2015) while employment is also improving at a faster pace than in any other country in the Euro area. This tendency is expected to continue. However, there are still several concerns including political risk and economic structural imbalances.

Two main political issues should be pointed out. Just as in Greece populism has gained importance in recent Spanish politics. In the local elections of last May the populists obtained remarkable results; Manuela Carmena, a former member of the communist party who is currently with Ahora Madrid, Podemos branch in Madrid, she has become Madrid’s new Mayor. However, the latest surveys for general elections, to be held at the end of this year, show that populism is losing its momentum. The second political concern are the Catalonian nationalists pretending that the next regional elections in September are a plebiscite for the independence of the Autonomous Community of Catalonia. In case the Catalonian nationalist won the elections, Madrid would be ready to enforce the law in accordance with the Spanish Prime Minister Mariano Rajoy. Therefore, although the nationalist manoeuvring is not expected to be successful it may still cause political distress.

 Regarding the structural economic imbalances, Spain still has the second after Greece highest unemployment rate of the Euro area, and unsound public finances with high deficits and debt to GDP ratios.

Although the Spanish economy by some indicators is doing better than other Euro area countries, several risks need to be closely monitored that will determine the medium-term market behaviour. 

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