These last days have been characterized by a strong revaluation of assets “made in Spain”. In the weeks before the evolution of government debt curve was growing apart from IBEX 35, in favor of the former. Consolidation of downward interest rates (which remind us of better times) has resulted in the risk premium quoted by the stock exchange.
Investment flows have put 10-year-profitability differential against Germany at 300 basis points below. Also, the Spanish Treasury has gained financing for 3 months at its lower cost in a historical series of auctions. The Spanish index has managed to dispel doubts and has reached 8,400 points. Cyclical and financial sectors have led the stock market reactions.
The keys to this sudden appetite for Spain are not clear but we have some hints. On one hand, data offered by the Bank of Spain about the pace of deterioration of the Spanish economy in the 2013 1Q (- 0.5%), is inferior to previous periods. This has been accompanied by a nod from Europe, delaying the deficit commitment by two years (the target would then be of 3% by 2016). On the other hand, we should not forget the effects of second-round monetary helicopter launched by the Bank of Japan (BoJ).
This new thrust of liquidity at zero price may be behind the strong inflow of money in pursuit of a still high profitability of the Spanish bond (and the Italian…). Speaking of central banks, the market also was encouraged to bet on the ECB lowering interest rates (some even advocate is will happen next week), as a result of poor macro data (especially IFO, PMIs) being the sign of a contagion from the periphery economies.
Will this bullish context of the stock market and national debt continue? I guess this voracious appetite may be smaller than we think, especially in equities. In the medium and long term, beyond the aforementioned nod from Europe, the economy continues to face problems that foreign investors still fear. Spanish unemployment rate and the poor results of some national blue chips paint a much stark reality.
Let’s hope the appetite continues and doesn’t end in indigestion, mostly financing costs of the Spanish treasure.