Summary:

• There are many doubts how or when Carles Puigdemont would initiate the process to leave Spain
• Spanish government briefs Puidgemont what he should do, if he wants to negotiate; European Commission weighs in as well
• S&P puts Catalan debt on a watch list with a possibility of a downgrade, local companies consider moving away to Madrid
• IBEX makes a U-turn, a risk premium eases marginally staying at elevated levels though

The political landscape in Spain has deteriorated since the beginning of this week in the wake of a groundbreaking vote in the Catalan referendum which could have fundamentally changed the relationship between Spain and the most affluent region of the country – Catalonia.

All the same, there are still many doubts surrounding a potential declaration of independence which has been proclaimed to be announced earlier this week. Attitude of Catalan President Carles Puigdemont appears to be cryptic thus it extends a period of uncertainty and weighs on Spanish assets at the same time. On the flip side, in his televised statement which he delivered yesterday there were no straightforward references to a declaration of independence, hence it could have been seen as a more conciliatory approach. Financial markets might be fond of an easier tone expressed by Puigdemont, however the jury is still out whether it’s a more meaningful change in rhetoric or just a try to appease political and financial turmoil.

Spanish government briefed Catalan President on Wednesday what he should have done if he wanted to begin negotiating saying “return to the path of the law, that he should never have left”. Furthermore, Frans Timmermans, first vice-president of the European Commission, weighed in on the topic as well suggesting that it was the “duty for any government to uphold the rule of law, and this sometimes requires the proportionate use of force.” In this speech he alluded to brutal steps which had been undertaken by police bringing about the myriad damages and nearly 900 injured.

Finally, from a financial standpoint one needs to note that Standard&Poors has put Catalan debt on a watch list with a possibility of a downgrade. Meanwhile, many companies being headquartered in Catalonia have begun considering to uproot to Madrid due to a prolonged political standoff. Even though there have been just contingency plans as of yet, it points to mighty ramifications which could emerge before long and if so, those could make Catalonia worse off.

10Y yield spread between German and Spanish bonds has moved up which points to an increasing risk premium in Spain. Source: Bloomberg

Softer remarks with regard to a declaration of independence from Carles Puigdemont have sparked a bout of optimism at the beginning of trading at the Spanish stock exchange as the IBEX (SP35) has already marked a stunning turnaround nearby its key support level we’ve pointed out lately. On the other hand, a Spanish risk premium remains elevated (it has narrowed subtly of late) as it was depicted at the chart above, hence it could cool off buyers’ optimism to some extent. However, the spread of 10Y yield heralds uninterruptedly relative undervaluation of the SPA35 compared to the German DAX.

The Spanish stocks has marked a major turnaround at the beginning of trading following the speech delivered by Puidgemont. Source: xStation5

The SP35 has managed to maintain above a noteworthy support line being underpinned by a 50% retracement. In effect a leg higher towards 10100 points could be likely to occur, bulls have to break it and stay above in order to convince more investors though. Having said that, simmering political uncertainties could be still weighing on the Spanish stocks unless we see a larger decline in a risk premium which could increase appeal of the IBEX.