Weekly View – A Socialist victory

The CIO office’s view of the week ahead.

Spain’s governing Socialist party swept to victory at the weekend’s general elections, which enjoyed the highest turnout since 2008, with a 75% participation rate. Taking 29% of the vote however, the Socialist PSOE party is far short of an absolute majority and will need to form a coalition, which will likely be fragmented and unstable given the election results. Furthermore, an alliance is not likely to be confirmed before Spain’s regional elections at the end of May. This turn to the left implies less fiscal discipline and higher taxes in Spain ahead, which may add to concerns around Italian budget negotiations this autumn. We remain negative on Spanish assets and peripheral bonds for now.

Oil prices reached a high for the year after the US announced the removal of sanction waivers on Iranian imports for certain countries. Brent broke USD 75 per barrel for the first time since October 2018. China was not only the biggest importer of Iranian oil, but had been ramping up its purchases from the country since the beginning of 2019. This could have an impact on the ongoing US-China trade negotiations. While oil prices could see a short-term spike and send waves of volatility through global inflation, our long-term forecast remains intact. We expect Brent will ease back as more export capacity for US shale oil comes on stream and Saudi Arabia adjusts its production to maintain market share in response. We continue to be positive on the energy sector.

As Q1 earnings season peaks, with two-thirds of US companies reporting by the end of the week, it is fair to say that earnings, while no means strong, have been less weak than expected. This has been enough to propel markets to new highs, with US equities making a full comeback from their December 2018 trough. Balanced risks to the market outlook remain, including to both the upside (US growth, central bank policy) and downside (world trade, stronger USD than anticipated, geopolitical risk in the Middle East). We are neutral on equities overall, with some protection for tail event risk, benefitting from cheap hedging at current low volatility levels.

César Pérez Ruiz, Head of Investments & CIO

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