Spain’s IBEX: +20% Yeild To Date

As the focus remains on Washington, let’s remind where the focus was this time last year. Last autumn, all eyes were on Spain as markets anticipated whether Madrid would accept the European Central Bank’s offer to purchase its bonds. Although Madrid refused, the effectiveness of the ECB’s OMT announcement was so powerful that it boosted the euro and dragged down all peripheral bond yields.

Spain did end up taking €41 bn from the EU to re-capitalise its banks, which have undertaken restrictive measures, such as capping dividends and raising capital.

Spanish 10-year yields have fallen for 4 straight months, down 40% from the 7% levels of last autumn. The Madrid bourse, IBEX-35 is up 20% YTD, overtaking the Eurostoxx, Dax-30, FTSE-100 and the Dow Jones Industrials Index over the same period.

On the credit front, both S&P and Moody’s rating for Spain are one notch above junk status, which may imply that a rating upgrade could well emerge from either of the two agencies. Moody’s raised its credit outlook for Spain to positive in October of last year, four months after it had downgraded it to Baa3. S&P downgraded Spain by 2 notches to BBB- in October 2012. Fitch delivered its downgrade by three notches to BBB in June 2012.

Spain’s banks are expected to raise their core capital ratios to around 10.5% by December, which is about 1% higher than it was a year earlier. Spanish bank dependence on ECB borrowing fell by 31% in the first 3 quarters of 2013 compared to the same period last year. While the credit metrics have improved, macro indicators remain dragged by 26% unemployment and a 5-year contraction.

Looking ahead for the IBEX, the break above the 200-WMA for the first time in 5 years is a telling sign of improving long-term trend. The breakout of the 3-year trendline on the monthly chart is accompanied by a robust convergence in momentum dynamics. A rise to 10,000 would mean an additional rally of 7%, which is widely expected as the ECB hints on a 3rd LTRO, the Fed remains locked in its $85 bn monthly purchases and the possibility of an outlook upgrade.

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