Spain: First impressions are not always correct, says JP Morgan AM’s Iain Stealey

Iain Stealey, portfolio manager in the International Fixed Income Group at JP Morgan Asset Management, says concerns over sovereign debt still outweigh the €100bn in support for Spain’s banks.

Another weekend and another European bailout package! This time it was the markets’ current concern that was looking to be addressed; Spanish Banks. Euro leaders felt that this time they were ahead of the curve and as markets opened on Monday investors initially agreed. Equities rallied, core government bond yields rose and peripheral yields fell following reports of an agreed €100bn package (significantly more than current IMF estimated requirements of €40bn).

However, the length of the warm happy feeling following a European bailout is diminishing on each new announcement. By midday, sentiment had shifted 180 degrees as concerns were surfacing regarding the implementation of the package. It appeared not to be the panacea that was hoped for, but instead the Spanish sovereign getting subsidised funding. This would make banks and the sovereign even more interconnected, and the debt to GDP ratio would increase as a result.

The concerns around the sovereign remains the heart of the problem for Spain, unemployment is high, debt levels are rising, GDP is falling and investors are concerned how this can be reversed without further bailouts. Expectations for positive growth in the region have now been pushed out to 2014.

Combine this with nervousness ahead of Sunday’s Greek election and the additional volatility that this could create if anti-austerity parties gain further support, investors are happy to position themselves close to home. Global portfolios remain neutral duration with overweights in US corporates and Core Europe covered bonds while positioned short the periphery.


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