Spanish Stocks, Bonds Rally as 10-Month Political Deadlock Ends

  • Rajoy may take office this week as Socialists drop veto
  • King Felipe begins consultations with party leader Monday

Spain’s stocks and bonds rallied as investors bet that the nation’s 10-month odyssey without a government will end within days, after the opposition Socialist Party agreed to let Acting Prime Minister Mariano Rajoy rule for a second term.

Spanish shares rose the most in Western-European markets after the agreement Sunday eased investors’ concern that a third round of elections under a caretaker government would derail investment and growth in the euro-area’s fourth-largest economy. The country’s 10-year government bonds climbed the most since September.

“It’s undoubtedly a positive development for the market because it gives investors more clarity about the political situation,” said Oscar Germade, an analyst at BNP Paribas SA in Madrid. “It’s helping the Spanish market rally on an already good day for Europe.”

The Ibex 35 is set for its highest close since April, having pulled ahead of the benchmark Stoxx Europe 600 in the past two weeks as squabbling among the biggest political parties subsided. After months of underperformance triggered by an unprecedented two rounds of inconclusive elections, the increase on Monday cut the Ibex 35’s loss since December to 3.2 percent.

Banks led gains, with the benchmark rising 1.5 percent to 9,242.4 at 2:55 p.m. in Madrid. Banco Popular Espanol SA, Caixabank SA and Banco Santander SA all jumped at least 3 percent. Yields on Spain’s 10-year bonds fell four basis points, or 0.04 percentage point, to 1.07 percent, in their biggest jump since September.

King Felipe begins two days of consultations with party leaders in Madrid on Monday, the start of a process that should see Rajoy’s People’s Party back in power within days. A first confidence vote may go ahead on Oct. 27 with a second round in which the Socialists abstain taking place two days later.

“Soon we will have a government that is open to dialogue and understanding, that will uphold the law and make sure it’s upheld,” said Rajoy in a speech in the capital.

The Socialist federal committee voted Sunday that the party’s 85 lawmakers should stand aside to let Rajoy form a government, Socialist caretaker party leader Javier Fernandez said in a televised press conference on Sunday. All the group’s lawmakers should refrain from voting with the aim of “unblocking the exceptional situation,” said Fernandez.

Rajoy applauded the Socialist decision, describing it as “important” and “reasonable.”

The Socialists had to choose between supporting Rajoy, a move that may undermine their credibility as leaders of the opposition, or triggering fresh elections with the party leadership in disarray after the ouster of ex-chief Pedro Sanchez this month. A new vote would see Podemos overtake the Socialists to become the main rival to Rajoy’s People’s Party, opinion polls show.

“The Socialist Party is trying to preserve the party system created in the late seventies,” said Ivan Redondo, a political consultant who has advised candidates from both main parties. “Refusing to reach a compromise would have meant Spain heading for a new party regime.”

— With assistance by Esteban Duarte, Camila Russo, and Maria Tadeo

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