Oil At 11-year Low, Election Impasse Hits Spanish Assets
Brent crude oil extended a slide on Monday to its lowest level in more than 11 years while investors dumped Spanish bonds and stocks after an inconclusive general election set the scene for potentially weeks of political stalemate.
Spain’s Ibex share index slid to a near three-month low but European stocks overall moved higher, taking their cue instead from equity gains in Asia and higher U.S. stock futures.
Spanish stocks and bonds recovered some of their earlier losses but were still down at midsession. Oil too had recovered some ground, having fallen early by more than 2 percent to a low of $36.05 a barrel.
That was its lowest since July 2004. It has lost a fifth of its value in the last month and a third since early October.
“Really, I wouldn’t like to be in the shoes of an oil exporter getting into 2016. It’s not exactly looking as if there is light at the end of the tunnel any time soon,” Saxo Bank senior manager Ole Hansen said.
Crude’s persistent weakness has exerted heavy downward pressure on oil exporting countries’ currencies, foreign exchange reserves and government budgets.
The latest to feel the heat was Azerbaijan, which on Monday floated its currency, the manat. The currency plunged 32 percent to 1.55 per dollar.
At 1130 GMT Europe’s FTSEuroFirst index of leading 300 shares was up 0.3 percent at 1,424 points, with Germany’s DAX up 0.9 percent, Britain’s FTSE 100 up 0.8 percent and France’s CAC40 0.5 percent.
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent, as investors bid up modestly priced Chinese blue-chips. China’s CSI300 index surged 2.6 percent, but Japan’s Nikkei 225 fell 0.4 percent.
Spain’s IBEX, however, was down 2 percent. Earlier it hit its lowest since Sept. 29 after the fragmented nature of Sunday’s election vote cast uncertainty over the country’s reform program and broader economy.
Prime Minister Mariano Rajoy’s conservative Popular Party won more seats than any other party but fell well short of a majority. Left-wing parties failed to win a clear mandate to govern either, and talks to form a coalition government could drag on for weeks.
“A center-right coalition cannot reach a majority… (and this) injects even greater political uncertainty. This is unlikely to be a positive development for markets,” Marco Stringa, senior economist at Deutsche Bank, said in a note.
“Overall the main risk remains political impasse due to the unprecedentedly fragmented parliament.”
Spain’s 10-year government bond yield rose almost 20 basis points to 1.89 percent, its highest in over a month. It was last at 1.80 percent, still well up on the day.
The spread over the benchmark German 10-year Bund yield widened to 130 basis points, also the highest in over a month.
“The risk of a fresh election being called next spring or one year after the one just held is high,” said Societe Generale.
In currencies the dollar was flat at 98.74 against a basket of currencies, and the euro was steady at $1.0865. The dollar rose 0.1 percent against the yen to 121.32 yen.
China’s yuan was fixed higher for the first time in 11 sessions. Beijing will keep monetary and fiscal policies accommodative in 2016 to help support the slowing economy, a source with the direct knowledge of the annual Central Economic Work Conference said on Monday.
U.S. stock futures pointed to a rise of around 1 percent at the open on Wall Street, rebounding from a volatile end to last week with the expiration of stock and index options contracts generating heavy trading volume.
The Dow ended Friday down 2.1 percent, while the S&P 500 lost 1.78 percent and the Nasdaq 1.59 percent. All three fell on the week.
Monday’s expected recovery on Wall Street put Treasuries under pressure, with the 10-year yield up 2 basis points.
That steepened the yield curve. The gap between two-year and 10-year paper had shrunk to 122 basis points last week, the smallest since early February, but on Monday was back out to around 125 bps.
A flatter curve is often an indication that economic growth is slowing, as investors price in the tightening effects of higher short-term rates on longer-term activity and inflation.
Gold continued to recoup some of last week’s initial slide following the first U.S. interest rate hike since 2006. It was up 0.6 percent at $1,072 an ounce, building on the 1.4 percent gain of the previous session.