After another difficult year for the euro area that was dominated by Grexit fears, Spanish elections over the weekend may well have created a new headache for the region as support grew for anti-austerity parties which prevented the Conservate Popular Party from achieving a majority. In fact, they were so far from it that a coalition government led by them looks very unlikely at this stage.
In order to do so, PP leader Mariano Rajoy will have to go into coalition with at least one leftist party which will likely cause huge problems in the continued implementation of austerity and reforms needed to fall in line with eurozone rules. As a result, we could now be facing an era on political paralysis and instability in Spain unless a more likely coalition of the left is formed, which again could create an even bigger headache for eurozone leaders insisting on fiscal responsibility.
The election result was hardly a surprise and as of yet, we’re not really seeing any negative reaction to it in the markets. Spain’s IBEX is currently seen opening only slightly more in the red than its other European counterparts while the euro is actually slightly higher on the day.
Oil prices have continued to decline at the start of the week and overnight fell to the lowest levels since July 2004. Brent crude has rebounded slightly to trade back above $36.40 but given the current downward momentum, more declines do look likely, with June 2004 lows of $33.08 offering further technical support. That said, the momentum does appear to have slowed a little over the last week, which could represent some profit taking ahead of the holiday period. Whatever the reason, this could offer some opportunity for short-term consolidation or a correction in oil prices.
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