Summary:

• Local government in Catalonia looks desperate to hold independence referendum on Sunday (1 October) despite opposition from Madrid
• Spain sees the referendum as illegal and has taken steps to prevent it 
• There is a distinct divergence between SPA35 and DE30

The last week of September is full of politics, especially in Europe. Investors have focused on Germany in the aftermath of parliamentary elections but much more important developments are taking place in Spain. Local elections brought nationalist and separatist forced in a region on Catalonia and although this local government enjoys only a slim majority it managed to push the concept of independence vote through a regional parliament. It’s not hard to imagine that Madrid is strongly against such vote yet it seems like the local authorities are determined to go through anyway. What could that hold for markets? Is SPA35 a bargain or is it at a serious risk of a crash? Let’s take a look at some selected bullets regarding developments in Spain: 

• The Constitutional Court suspended the independence vote calling it illegal and unconstitutional 
• Catalonian Premier Carles Puigdemont said there were contingency plans to arrange the vote anyway
• Police arrested highly ranked political figures in the regions and seized 9 million voting slips, this action caused clashes with police as some 40 thousands people made it to the streets in Barcelona last Thursday
• Major political parties in Spain (PP, PSOE) signalled they were willing to discuss the future of regional model for Catalonia if the referendum were called off
• Spain’s public prosecutor ordered Mossos (Catalonian police) to guard educational centres in order to prevent them being used as voting stations. However the head of Mosses rejected this call as “interference of the Spanish state”
• More than 700 mayors in Catalonia declared a support to local government, although some large cities backed the State
• Region’s election commission has been dissolved by Madrid and Guardia Civil reinforcements have been deployed in the region
• Puigdemont hinted his party would be against declaring independence right away and instead he would like to have a discussion with Spain and the EU first

This situation seems to be extremely complex. It seems like some kind of vote will take place regardless of the opposition of the state. What happens next if the outcome is yes? (which it could very will be since there is no minimum turnaround and given all the harsh measures we can imagine that backers of independence will be more determined to vote whereas those who prefer staying in Spain could simply boycott the vote). Are we headed for some major clash with the police? Or perhaps local police could clash with Guardia Civil under some very nasty circumstance? It’s too hard to tell at the moment but markets are worried. Catalonia is a very important business region and some major companies including Caixabank (the third largest bank in Spain) are headquartered there. 

The Spanish Ibex is relatively low versus the German Dax. Source: Macrobond, XTB Research 

Looking at the equity markets, we can see that a relationship between the Spanish Ibex (SPA35 on the xStation platform) and German DAX (DE30) is not far from the lows of the decade. 

Investors assuming that situation will stabilize could consider trading SPA35 against DE30 in a hope that divergence will close. Source: xStation5 

A lag between SPA35 and DE30 is apparent also in the shorter run. Looking at the H4 interval we can see a distinct divergence between SPA35 and DE30 that are normally highly correlated. If the situation calms down we could expect SPA35 to catch up to DE30. However, if there are outbursts of violence during the weekend and investors start worrying about political stability in Spain this divergence could deepen, even if just temporarily.