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 plan 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 central government has increase efforts to eliminate any trace of a referendum including confiscating by force ballet boxes, shutting down social media site 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 Catalonian that do find a way to vote (eliminating balancing vote of opponents of independence) in a board majority vote for succession. A similar pattern witnessed in the “non-binding” referendum in 2014. To defuse tensions, there has been signals from both sides that discussion 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 passions are running high, were 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.
By Peter Rosenstreich