April 29, 2019 / 7:32 AM / 2 months ago

Daily Briefing: Spanish vote gives Sanchez options

LONDON (Reuters) - Spain's Socialists came out top in Sunday's election but, as widely predicted, now face weeks of negotiations to form a coalition. Beyond that, however, there are several interesting take-aways from the results so far.

Spain's Prime Minister Pedro Sanchez of the Socialist Workers' Party kisses his wife Begona Gomez while celebrating the result in Spain's general election in Madrid, April 29, 2019. REUTERS/Sergio Perez

First is that PM Pedro Sanchez could just about govern without recourse to Catalan separatists if he can form an alliance with left-wing Podemos and an array of Basque regional and smaller parties.

If that is the case, would that weaken leverage for the Catalonia independence drive and so make Spanish politics a little more stable than they have been of late?

Second, although far-right upstart Vox will enter parliament, they will do so with fewer seats than they had hoped after Sanchez and allies successfully portrayed them as dangerous fascists.

That may be something that only works in a country like Spain with a recent history of dictatorship, but one that mainstream party strategists elsewhere will nonetheless note.

Third, Sanchez’s party won on what was essentially a pro-European Union, socially liberal ticket: that (coming only a few weeks after pro-EU liberal Zuzana Caputova bucked the eurosceptic trend to win Slovakia’s presidential election) suggests there is an appetite among voters to push back against anti-EU parties in next month’s European Parliament – if that appetite can be awakened.

On the Brexit front, EU negotiator Michel Barnier said at the weekend he was expecting to know this week whether cross-party talks between UK Conservatives and Labour would yield anything.

Time is running out for PM Theresa May if she wants to avoid holding European Parliament elections but there has been little evidence of progress so far. The other thing to watch for this week is whether opposition Labour confirms it will be heading into those elections on an explicit manifesto promise of demanding a second referendum with a Remain option.

That is the clear message coming from the party’s grass roots but the leadership around Jeremy Corbyn remains reluctant to go that far and may water down any such guarantee. The manifesto is expected to emerge around Tuesday.

In Berlin, German Chancellor Angela Merkel and French President Emmanuel Macron are due to host a dinner for six Western Balkans leaders aimed at discussing China’s influence in the region and the ongoing conflict between Serbia and Kosovo.

One point of contention is a suggestion by leaders of those two countries that lingering tensions could be allayed by a deal to swap various parts of their national territories with each other. While that has been tentatively welcomed by some EU officials, Merkel fears it could open a Pandora’s box of other border disputes in the region. She and Macron are due to give a statement at 1515 GMT.

MARKETS AT 0655 GMT

An upside surprise at last. The positive U.S. GDP boost on Friday allowed Wall Street’s S&P500 to notch up another record close on Friday, and the good mood has rippled across a Japan-less Asia overnight.

"We have flipped from a state where it is a stock rally no one wants to take part in, to a frenzied paced splurge where hedge funds and investors alike continue to chase markets like greyhounds to the mechanical rabbit"

With Tokyo markets out for an extended holiday, Asia’s other main markets lapped up the above-forecast 3.2 percent U.S. first quarter GDP reading. Seoul’s Kospi jumped 1.7 percent and Hong Kong’s Hang Seng gained 0.8 percent. Shanghai underperformed to end little changed as China’s similarly positive GDP reading earlier this month has only brought angst about a pause in additional policy stimulus there.

The dollar, whose DXY index charged to its highest level in almost two years last week, has ticked back on Monday and eased some of the nastier effects of a U.S. growth surprise on emerging-market economies. With the first-quarter U.S. earnings season so far beating forecasts and speculators building up short positions in ViX volatility again according to the latest CFTC data, the risk-on mode has gone up another notch.

Attention now shifts to Wednesday’s Federal Reserve policy decision – with the GDP reading create some complications. Most analysts feel Fed Chair Jerome Powell will not want to disturb existing market thinking on the interest rate horizon.

But while markets have leaned to the possibility of a rate cut by the end of the year, the first-quarter growth number and Wall Street’s record highs mean he’s unlikely to signal any easing yet. Further complicating the picture, and some say driving some of the dollar gains last week, is what the Fed signals on its still-shrinking balance sheet.

Tightness in the U.S. money markets has seen the effective Fed funds rate pumped up this month and has prompted some to wonder whether the Fed will respond by cutting interest rate it pays on excess reserves. That would be largely a technical tweak, but the Fed will be wary of what policy message it would send.

Back in Europe, euro/dollar and euro zone stock futures were higher and Italian sovereign debt yields fell after S&P Global affirmed the country’s credit rating at BBB – two notches above junk territory, to the relief of some investors who feared a downgrade was possible given recent Italian growth revisions.

The likely return of Spain’s incumbent Socialist Party government to power after Sunday’s elections also eased some European political concerns. Oil prices were still smarting after U.S. President Donald Trump on Friday knocked up to 4 percent off Brent crude by calling on OPEC countries to lower energy prices. Brent slipped further on Monday to below $72, from five-month highs as $75.60 as recently as Thursday.

Elsewhere, the combination of U.S. growth and a slightly weaker dollar buoyed emerging-market equities and currencies generally. Argentina’s peso and Turkey’s lira continued to weaken, however, even though China’s yuan and South Africa’s rand have recovered from last week’s lows.

— A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own —

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