Take 5 and come back tomorrow (31/5/24) Markets Politics Inflation BBVA SAB Utilities

None of what follows is investment advice.

Market environment: Inflation trumps activity - (Asia-Pacific markets rose with European futures flat and those for the US moderately down) – Asia-Pacific markets rose while awaiting inflation input in the US and Europe, despite weak Chinese economic activity. Futures for Europe are flat and those for the US moderately down.

Response to the crisis: It’s worse than an unconstitutional act, it’s a mistake - (PM Sanchez manages to have parliament approve the amnesty for crimes related to the Catalan independence movement, with his partners already demanding a referendum on independence (Expansion p26) – The approval of the amnesty without first having achieved wide support across the political spectrum is negative as it creates legal uncertainty without delivering the “reconciliation” that was officially sought. Worse still, the amnesty does not even look like calming down the push for Catalan independence, judging from the calls for an equally contentious referendum to be held on the issue.

Inflation: Tough base - (The advance on the May CPI shows a 3.6% YoY rate vs. the +3.3% of April, with underlying inflation rising from+2.9% to +3.0% (National Statistics Institute) – The rise in May inflation is not positive, although it should be noted that the base for comparison was challenging (May 2023 0% MoM vs. +0.3% in May 2024). The acceleration is also not only due to energy and food prices, as underlying inflation rose, albeit less so. This said, the rise in inflation in Spain is unlikely to be a deciding factor for the ECB interest rate decisions, and could be taken as an indication of continued strength in consumer demand.

BBVA/Sabadell: Salty estimates - (A Bank of America report considers that BBVA could raise the price of its bid for Sabadell (Expansion p16)/Sources close to Sabadell estimate that the cost of a merger with BBVA could amount to €2.4bn, 65% more than estimated by BBVA (Expansion p17) – As I mentioned yesterday, the fact that as a hostile bidder BBVA has not had a chance to look at the Sabadell books complicates a potential improvement of the price of the BBVA bid, especially if it were to include a cash component. However, note that just as BBVA has not had a look at the Sabadell accounts the reverse also holds true. So, all estimates of synergies and costs should be taken with a pinch of salt.

Utilities: I’ve got your back - (Sedigas sees as urgent payments for capacity in order to make CCGT plants viable (Cinco Dias p4) – The increased weight of renewable generation has crowded out CCGT plants, resulting in low utilisation rates and challenged profitability. However, given the intermittency of renewable generation, CCGT plants are still essential as back-up power. The problem is that topping up their profitability via capacity payments risks raising the cost of generation and undermining the view that renewables produce sustainably lower electricity prices.