(Bloomberg) -- Just as Spanish stocks were starting to rally toward this year’s highs, a coalition with an anti-austerity political party is dampening the mood once more.

The benchmark IBEX 35 Index is down 2.5% since Sunday’s vote that left the ruling Socialists weaker, forcing them to seek a coalition with an erstwhile foe. Only last week, the measure rose to a six-month high and traders poured the most money since June into an exchange-traded fund tracking the nation’s shares.

With the recent spate of losses, Spain has now overtaken the U.K. as the worst-performing equity market in Europe this year.

After losing ground in the election, Spanish Prime Minister Pedro Sanchez is sealing a pact with Podemos to form a government. Sanchez also needs to scour the new parliament for votes to make the deal work. That’s one more headache for Spain’s equity investors already contending with a market that has struggled to keep up with peers amid troubles at its banks and utilities.

The coalition with Podemos “does refocus the attention on the banking sector as one source to pay for the governments plans,” said Benjie Creelan-Sandford, an analyst at Jefferies. “The outlined pact is light on details and nothing is addressing the banking sector just yet. Hitting the banks with additional costs does certainly not help with the weak profitability that is already a concern for the ECB and the Bank of Spain.”

Banks led losses on Wednesday as the IBEX declined for a fourth day.

Investors had been piling into the region’s funds ahead of the election -- the iShares MSCI Spain ETF received inflows in the past two weeks, the first since August.

The IBEX 35 dropped 1.4% on Wednesday, trimming its 2019 advance to 7.5%. The broader Stoxx Europe 600 Index, by comparison, is up 20%. With a potentially contentious coalition at the helm, Spanish stocks may not be off the hook just yet.

“The coalition will be difficult to manage on a day-to-day basis,” Francisco Riquel, an analyst at Alantra Equities, wrote in a note Tuesday, highlighting that passing the 2020 budget as the first major hurdle to clear. “The risk of repeat elections in 2020 remains high, and the new government is in any case likely to be weak.”

--With assistance from Macarena Munoz and Charles Penty.

To contact the reporters on this story: Namitha Jagadeesh in London at njagadeesh@bloomberg.net;Jan-Patrick Barnert in Frankfurt at jbarnert3@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Celeste Perri

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