Spain goes to the polls on Sunday in a snap national election that will most likely shape its economic and political outlook.

With this big risk event around the corner, you may be wondering what exactly is going on.

Here, we’ll unpack the developments in Spain and look at how they could impact your trading.

What is happening?

On Sunday 23rd July, Spaniards will vote for a new parliament.

Polls open at 07:00 GMT and close at 18:00 GMT in mainland Spain.

Why is this happening?

A national election was due by December, but Spain’s incumbent Prime Minister Pedro Sanchez unexpectedly called a snap ballot after his Socialist party suffered a painful defeat in local elections back in May.

Who are the major players?

  • Pedro Sanchez: Spanish Socialist Workers Party (PSOE) - Centre-left, social democracy
  • Alberto Nunez Feijoo: PEOPLE'S PARTY (PP) - Centre-right, mainstream conservatism
  • Santiago Abascal: VOX – Far-right, national populism, anti-immigration
  • Yolanda Diaz: SUMAR ("UNITE") - Progressivism, environmentalism

Crunching the numbers 

No party is expected to secure an outright majority in the 350-seat parliament.

According to the final opinion polls allowed under Spanish law before Sunday’s election, the conservative People’s Party (PP) is ahead of the ruling Socialist Workers Party (PSOE). However, to govern PP would most likely require the support of the far-right VOX party.

  • PP: 140 seats 
  • PSOE: 108 seats 
  • Vox: 36 seats 
  • Sumar: 33 seats 
  • Others: 33 seats

What does this mean?

Ultimately, it means Spain could see a far-right party back in power for the first time since the country’s dictatorship ended in 1975.

How might this impact Spain?

The fourth-largest economy in the euro area is facing multiple headwinds in the form of sticky food inflation, lagging growth compared to its European peers and falling disposable income among households.

Should a new right-wing government come into power, it could change the course of Spain’s economic policy. Without digging too deep, this represents some element of uncertainty that could influence confidence over the country’s economic outlook.

What could go wrong?

After Sunday’s election, a new parliament must be established by 17th August. However, there is no deadline for the candidates’ negotiations to form a government.

Taking a trip back memory lane, Spain faced months of uncertainty back in 2019 after it took Sanchez two elections to form a government. 

Should PP and Vox fail to cut a deal despite gaining the majority, this could result in another election. 

How may this move the SPN35? 

Broadly speaking, the market-friendly outcome appears to be a right-wing majority.

This is because last year, the incumbent Sanchez administration unleashed a windfall tax on banks. While the tax was due to expire by 2024, the current government has considered making it permanent.

It is worth keeping in mind that financial stocks account for 28.5% of the IBEX 35, and are the largest sector represented.

Market optimism over the new government removing this tax by 2024 could inject IBEX 35 bulls with renewed confidence.

  • An outcome that results in the far-right party back in power may propel the SPN35 back towards the 9650 resistance level.
  • A hung parliament scenario that results in fresh uncertainty could hit appetite for Spanish stocks, dragging the index back towards 9000 and possibly lower.

Taking a deeper dive into the technicals, the SPN35 remains in a wide range on the weekly charts with support at 9000 and resistance at 9650. A breakout could be on the horizon, but this is likely to be heavily influenced by Sunday’s election result. 

A breakout above 9650 may see prices test levels not seen since February 2020 at 10000. Should prices tumble and experience a break below 9000, this may open a path back toward 8540.

A special message for FXTM clients:

Due to the Spanish General Election on Sunday 23rd July, we’ll be temporarily changing our margin requirement for the Spain 35 Index (SPN35 & SPN35_m) from 1:200 to 1:50.

This change will be effective from Friday, 21st July (before market open) to Monday, 24th July. However, we may extend this depending on market conditions.

If you have any open positions on the Spain 35 Index, please consider your trading strategy and make sure you have enough funds in your account to cover the new margin requirements.

If you have any questions about this or need help with your account, please do not hesitate to contact us.

Kind regards,

FXTM Team