The conditions in the latest Treasury auctions in Spain have improved considerably, both with lower interest rates and higher demand. Are we seeing a steady momentum, or there will be a new rise in interest rates?
For now, we are living a sweet moment with a high demand for Spanish Treasury bonds and bills, which has had a positive impact on the private sector as clearly shown by some companies on the IBEX 35 that have sold their own issues thanks to this return of investor risk appetite. However, we must remain vigilant, because this improvement is based just on predictions and talk.
In other words, the improvement of interest rates comes from major players in the global markets, who are taking positions and anticipating the upturn of the European economy–which should take place in 2014. Furthermore, Draghi’s position as the head of the European Central Bank (ECB) and his statement about doing anything necessary to save the Euro and the Eurozone project provides a great sense of safety. Be that as it may, the real economy must start recovering in order to maintain low interest rates this year.
In your opinion, how will the Spanish risk premium evolve throughout 2013?
I think this year we’ll see two clearly different periods. The second semester depends on what happens in the first one. As a matter of fact, in the next five or six months, peripheral countries will face several Treasury auctions; some rescued countries–such as Portugal–will try to re-enter the credit markets; and we still have the unresolved problem of Greece. And the problem of the debt ceiling in the US weighs increasingly; and if the result isn’t satisfactory, risk assets’ prospects (like Spanish debt) will be damaged. So that’s why the path of the Spanish risk premium depends on the first months of 2013.
Nonetheless, we are optimistic and we see a positive scenario in which the Spanish risk premium may go below 300 basis points, and even below 250 mark before the end of the year–if macroeconomic data help.
Regarding the Euro, will it be stronger or will it loose ground against the Dollar?
Europe doesn’t really know yet what to do with the Euro: whether devalue or revalue it. Each country has its own interests, so it’s really difficult to come to terms. We don’t even have institutions with specific mandates or with enough independence to decide what is best for the Union regarding the common currency. That’s why we depend on Bernanke and the policy of the US Federal Reserve–which will probably keep on with the devaluation of the Dollar. Therefore, although the Euro shouldn’t trade above 1.30US$, it is likely that it will fluctuate around 1.30-1.40US$ because of the unemployment rate of the US.
Some experts say that market valuations suggest a level of 9.000 points in 2013 for the IBEX 35. Is it possible to reach that level?
The Ibex35 is one of the indexes that will behave better in case that the positive scenario prevails. It is worth to have in mind that the Spanish index has been punished quite severely by capital flows, which have drained it massively leaving more than a few companies at very attractive prices. We have to consider that, as in every selective index, those names which are part of it represent the “survivors”, that is, the ones that have behaved better in a period of maximum stress, while some of the weakest assets–like Bankia–has already got out of the Ibex. At this point, we dare to forecast that whenever the world economy recovery gets consistent, as well as good macroeconomic figures show up in Europe and investors continue to support the Spanish auctions, our selective should reach to 9.000 points in 2013.
Who will have a stronger role in the markets, Europe or the US?
In the US, the key question is the debt ceiling, because if they don’t solve that problem, it could lead to a strong declining in equity. Markets trust in the pragmatism of North-American politicians with regard to reaching an agreement. However, thetrouble is especially sensitive, and the short-term will be really slanted due to this fact. Regarding Europe, the Greek problem and the peripheral fixed income (especially in relation to demand and yields) will have the leading role in the short-term. In any case, the most probable scenario is that European markets will take the lead instead of the US’s, because they have been the most affected by the crisis and because they offer much more attractive prices in the long-term–with the exception of the German DAX.
How will stock indexes behave in the short and medium-term outlook?
Regarding the short-term, markets will be focused on the Greek problem, on the value of peripheral risk premium, and also on the next steps towards the Banking Union, which will let the member states of the Eurozone gradually give up sovereignty. Thus, EU institutions will be able to be more effective on economic policy. And that is precisely what markets are asking for: more Europe. Therefore, we will find laterality within markets.
Nonetheless, in XTB we have an optimistic feeling for the medium-term, and we believe that if Europe does its homework, the markets in the Eurozone will take advantage and they will become a very good investment opportunity–especially for the second half of 2013. Now, it will be necessary that macroeconomic data play their part.