All Eyes On Spain As Risks In Catalonia Build

All Eyes On Spain As Risks In Catalonia Build

Swissquote Ltd  | Sep 29, 2017 16:22

While the German elections (still a non-issue) continues to dominate Europe conversation, events in Spain are about to heat up. Where this story takes markets, confounds and worries this strategy desk.

The Catalonia referendum on Independence is planned to take place on Sunday 1st October. The Sunday vote will ask Catalans if they would support a separate state from Spain. Based on the 1978 “unity” agreement, the Spanish constitutional court has ruled the referendum illegal. The regional government remains committed holding a vote while Spain's central government has increased efforts to eliminate any trace of a referendum including confiscating ballet boxes by force; shutting down social media sites and detaining regional political figures.

Markets are betting that the efforts by the central government to stymie representative results will delegitimize any Sunday ballot. Yet these efforts by the central government, in our view, will most likely backfire as the Catalonians that do find a way to vote (eliminating balancing vote of opponents of independence) in a board majority vote for secession. A similar pattern witnessed in the “non-binding” referendum in 2014. To defuse tensions, there have been signals from both sides that discussions for a calmer resolution are on the table.

Offers to the Catalan government of a new financial constitution will address a primary point of contention. But overall we have the feeling that passions are running high, where suggestions of future talks will not appease the Catalonians. Markets are not pricing in any risk for Sunday as short-term EURUSD implied volatility are actually lower then longer term. We would be wary of hold spec positions over the weekend as truly all things are possible in Barcelona.

Swissquote Ltd

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