Crisis? What Crisis? it's just another Monday morning...

Monday 30th October 2017

Crisis? What Crisis? it's just another Monday morning...

ref :- General , and "Rajoy wrongfoots separatists", the Financial Times

There's been quite a lot of chat in 2017 about the market's sangfroid  --  it's apparent ability to shrug off developments that instinctively one feels ought to be causing it more stress. There are those that would argue that what appears to be remarkable resilience is only possible against the supportive background of ultra-easy monetary policy, and this period of historically low volatility should be a worry in itself. They may well be right  --  sooner or later they're bound to be  --  but harbingers of doom have generally had an expensive time of it of late, market-wise.

Take Catalonia for example, an existential issue for Spain and a thoroughly unwelcome development for the European Union that surely qualifies as a genuine crisis. Friday saw the Madrid government impose direct rule from Madrid after sacking the Catalan government, which responded by reasserting its claim for independence. The market reactions ? The Ibex 35 stock index is 1.4% higher this morning. The Euro is marginally stronger this morning after a tough week that had more to do with a doveish ECB than anything happening on the Iberian peninsular.  And bonds ? Remembering that yields and prices move inversely, the 10yr Spanish government bond now yields 1.51%, its lowest since early September.

When this thing was blowing up and the yield premium between 10yr Spanish bonds and their German equivalents was trading at 120 basis points, you may remember someone suggesting (it may have been us) that it would be reasonable to assume that this spread might widen if the situation deteriorated. Well, it did .... very briefly to about 130bp but you would have had to have been darn quick to take advantage and this morning that spread is trading at 113 bp. It's true that all peripheral Eurozone bond markets have all benefitted from Standard and Poors' upgrade to Italy's credit rating on Friday, but in its way that's rather the point. The way that the developments in Barcelona are being viewed as a distant second in importance to the S&P decision is pretty solid confirmation that so far at least, the markets continue to take everything in their stride.

Whether you believe that the markets' performance is an accurate reflection of the realities of the situation or a collective thrusting of heads into the sand, there are indications that the rush to Catalan independence may have lost some of its momentum, temporarily at any rate. Most obviously, the huge anti-independence rally in Barcelona yesterday lent some credibility to the view that those Catalans seeking a split from Spain are in fact in the minority, something that Madrid has maintained all along. Most of the early opinion polls make it a close call between the two sides in new regional elections called for Dec 21st, and the question of whether separatists or unionists emerge in power may well come down to who is the more successful in negotiations with possible coalition partners.

There's a suspicion that PM Rajoy may have outflanked the separatists by calling an election for just eight weeks time. A longer period, six months say, might have enabled those seeking independence to stir up a fervour about so-called "foreign occupation". As it now stands, with the much shorter time period, they'll need to spend almost all of their time and energies in preparing for the election.

Another disappointment for Carles Puigdemont and his colleagues will have been the almost total lack of international support  --  from those that matter anyway (with due respect to Scottish Nationalists and a few Slovenian veterans). Not that they SHOULD have been surprised by this. Fragmentation of constituent members of the EU is the last thing that that body needs, and don't forget that Spain is not the only country with increasingly strident elements that need little encouragement to chase the same goals as the (former) Catalan government  --  the Flemish in Belgium, for example.

So there are reasons why one might believe that the status quo will survive, though we are finding it quite difficult to be too upbeat about the possible outcomes. If the separatists win the election, we'll be in the same situation as we are now except that the currently questionable claims of a mandate for independence will have been validated. How would the Madrid government still intent on holding greater Spain together handle that one ? And if they lose it, would they accept the result or, now roused, would they continue a campaign of civil disobedience and protest ? And if so, when does disobedience become unrest and violence ?

Oh come on, that's a bit pessimistic, isn't it ? Perhaps ..... the markets seem to think so, at least. They may yet have cause to change their minds, but plainly they're not of a mind to just yet.