Why Spain bailout delay should worry investors

(Photo credit: Commodore Gandalf Cunningham)

Madrid. Oct.5, stock trade .-Spanish Economy Minister Luis de Guindos reportedly drew snickers from a London audience when he denied the country needs a full  bailout. But for investors around the world, the growing risks posed by Spain’s reluctance to ask for help are no laughing matter.

Speaking on Thursday, De Guindos’s comments came on the heels of Prime Minister Mariano Rajoy’s denial earlier this week that the country was preparing to apply for a rescue as early as this weekend. Read: De Guindos: Spain does not need a bailout.

The situation has contributed to growing event risk, which presents a major headache for strategists and investors because of the difficulty involved in trying to be positioned on the right side of such an event. In a note entitled, “Don’t take Spain delays lightly,” Jose Wynne, head of North America foreign-exchange research at Barclays, spelled out some of the potential pitfalls to investors on Friday.

“The market is OK for now because of the perception that sooner or later, Spain will have to give in,” said Wynne, in the note. “We disagree and suggest not taking that statement for granted.” He explained that the market rally has recently come to a halt–despite upbeat factors as a more stimulus from the Fed and the perception China is unlikely to surprise with bad news–because of Spain.

Range-bound trading has become the norm for Wall Street recently as the positive impact of central bank stimulus and even ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro have faded. The Standard & Poor’s 500 index is looking at a 16% gain for the year so far, and is up around 1.4% since the start of the fourth quarter. Europe’s Stoxx 600 is up 11% year-to-date and 1.7% quarter-to-date.

While often other factors come into play for commodities, oil prices have pulled back from highs nearing $100 earlier in September to lurk around the key $90 a barrel level and gold has refused to make headway above $1,800 an ounce. Wynne said if the Spanish government goes ahead and accepts the conditionality required by the European Central Bank to buy bonds in the front end, then the market will have to play catch up. “If it delays it, they will not be OK for too long,” as the “status quo will not hold,” he said. Read: ECB’s Draghi to politicians: your move.

He expects Spain to ask for help ahead of the European Union summit on Oct. 18 to 19. If that doesn’t happen, Wynne said Barclays is prepared to take a more cautious approach.Read: Euro crisis could turn on these key October dates ... Continue to read.

Related articles

• Spain 'does not need a bailout' (bbc.co.uk)
• Spain racks up tension on bailout (standard.co.uk)
• Spain: The ECB's Plan May Not Be Enough (businessweek.com)