LONDON/MADRID, Jul 24 (Reuters) – Spanish blue-chip stocks fell on Monday after a snap general election over the weekend failed to produce a clear winner, with investors penalizing banks and utilities in particular.
Spain faced a political stalemate on Monday after right-wing parties failed to secure a decisive victory and no clear winner emerged in Sunday’s national elections.
Madrid’s IBEX 35 (.IBEX) equity benchmark index fell as much as 1.8% in early trading and was down 0.7% last time. It underperformed the wider STOXX 600 (.STOXX), which was flat.
The centre-right People’s Party (PP) and far-right Vox together won 169 seats in parliament, while the ruling Socialists (PSOE) and far-left Sumar won 153, far short of the 176 seats needed for a majority.
“The overall declines are due to the market anticipating a weak government or an upcoming election,” said Natalia Aguirre, head of analysis at Renta 4.
“Now we are entering a period of uncertainty, which is the worst possible scenario for the markets.”
The outcome could eventually lead to an extension of a windfall tax on the financial and energy sectors beyond the current two-year period. PP chief Alberto Nunez Feijoo had vowed to change taxes if he came to power.
Shares in major lenders Santander (SAN.MC), Sabadell (SABE.MC) and Caixabank (CABK.MC) fell between 1.4% and 2.6%. The Stoxx 600 banking index (.SX7P) was down 0.4%.
Goldman Sachs said on Monday that the outcome of the election could also be a temporary setback for Spanish utilities, after the market recently turned more positive for Endesa and Iberdrola due to “a possible government change and prospects for reduced regulatory intervention”.
Endesa (ELE.MC) fell 3.5% while Iberdrola (IBE.MC) fell 0.4%.
City Index strategist Fiona Cincotta said: “I don’t think it’s necessarily part of a darker longer-term outlook for Spain, but remember that right now we see uncertainty and markets hate uncertainty.”
Political adviser Eurasia Group said the uncertainty could last for months, as it did in 2019, when two consecutive elections were held before a government could be formed.
“For now, repeat elections seem the most likely way out of the deadlock (a 40% probability); if so, they will most likely be held in the fourth quarter of this year,” said Federico Santi, senior analyst for Europe at Eurasia Group.
The risk premium for Spanish government bond yields relative to the German 10 – year benchmark increased slightly to around 106 basis points .
Spain’s economy has held up relatively well, but is slowing after recovering from the pandemic. The government predicts a growth of 2.1% for 2023, compared to 5.5% last year.
A slowdown means Spain’s high debt of more than 100% of GDP and deficit of 4.8% of GDP are at stake, and protracted talks to form a government could delay fiscal reform and worsen finances.
Giles Gale, head of European interest rate strategy at NatWest Markets, said the election was only slightly negative for Spanish government bonds compared to their German counterparts.
“There are plenty of reasons for resilience,” he said. “The strong fundamental narrative still holds: positive debt dynamics, economic momentum and financial resilience, strong financing progress and an increase in domestic debt demand.”
Additional reporting by Stefano Rebaudo and Danilo Masoni in Milan and Harry Robertson in London; Edited by Dhara Ranasinghe, Angus MacSwan and Sharon Singleton
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