IBEX 9 000

Could the question of whether Madrid seeking assistance from the EU/IMF and implementing reforms end up being a win-win situation for Spanish shares?

In the event that markets apply pressure on Spain to seek a bailout – with the benefits of Spanish bond purchases from the ECB – then the outcome could well be rewarding for Spanish bonds. 10-year yields are already down 29% following Draghi’s vowing to rescue the eurozone in July. The downward momentum on Bonos could well intensify, and 10-year yields reach 5.00%.

If Madrid avoids seeking a bailout this year, then it could well be a reflection of improving global market conditions (falling bond yields, supported equities, stabilizing euro, re-emerging confidence), possibly paving the way for improving macro-economic variables (PMIs, unemployment and consumer spending).

Current market chatter suggests Spain will make a formal request for an international rescue, with the pretext that it requires funds to back Spain’s ailing autonomous regions such as Catalonia. And so in order for Madrid not to risk a deterioration in its public finances, it would have to avoid a breakdown in relations with its many needy autonomous regions by bailing them out. And such assistance could not happen without Madrid seeking assistance under the EFSF/ESM program.

The IBEX may be -4% year to date, but +40% from its July lows. The latest monthly reversal has given way to a break-out above the 16-month trendline. An extension towards the 9,000 territory is not ruled out for end of Q4. 7,930 stands at the required support for the index to chart its recovery towards 9,000 and onto 9,300.

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