Spain Becomes Third EU Country To Get New Government

Spain became the third party in a month to throw out an incumbent government, with Mariano Rajoy’s conservative Peoples Party securing a landslide victory in elections last night. The win gives the new government a strong mandate to implement deep spending cuts totalling EUR40 billion aimed at reducing Spain’s deficit to 4.4 per cent this year. Mr Rajoy has also pledged to liberalise the rigid Spanish labour market in an effort to cut unemployment and restore confidence in the international bond markets. So far so good then, as the yield on the benchmark 10 year Spanish note has fallen slightly but still remains in the danger-zone of the 6-7% range. The Euro has opened the week relatively unchanged from Friday but we could be looking for it to weaken further today if stock markets remain on the back foot.

The Pound has started the week roughly unchanged against the Euro and Dollar but weaker than expected house price data overnight has seen Sterling fall slightly in early trading. The UK government will use the data in announcing a huge new house building policy aimed at kick starting the ailing house building industry and take another step towards showing voters the coalition government does have a credible growth plan. The scheme will also see tax-payers underwriting first time buyer mortgages to secure demand for the new homes.

Data this week includes UK GDP on Thursday and the Bank of England minutes Wednesday. Both will probably confirm the Bank plans to use more QE over the coming months to boost growth again. In the US we also have GDP and the Fed minutes, which are more likely to show a muddling through of the US economy and that it remains in the corridor of uncertainty which further monetary action is deemed unnecessary but the recovery never really gets going. EU data includes German GDP and a whole host of PMI figures due on Wednesday.