“Forget Germany, Spain Is The Real Problem”
Following yesterday’s German election, which despite Merkel’s 4th victory was a rout for the establishment “grand coalition” parties of CDU/CSU and SPD which saw its worst election performance since the 1940s offset by a surge in the ascendant right-wing AfD, there have been numerous analyst reactions to the “sudden reemergence” of populism in Europe, but one we find perhaps the most insightful and useful, comes from Bloomberg macro commentator Mark Cudmore, who writes this morning that for all the concerns, it’s not so much Germany as what is about to happen in European peer Spain, where Catalonia is set to hold an independence referendum on October 1, that should be on traders’ radars.
Below is his latest Macro View explaining why…
Euro Crisis Trading May Be Due for an Encore
The euro is once again set to suffer from an outsized political premium. Spain, rather than Germany, is the real problem.
The AfD’s strong performance in the German election and the lack of a clear coalition are both concerns at the margin, but they wouldn’t provide a sustainable headwind for the euro in isolation.
Much more worrying is Catalonia’s planned independence referendum on Oct. 1. Investors have been ignoring this story, but this week will see it take center stage.
The heavy-handed response by the central government in Spain has significantly elevated the probability of civil unrest as well as potentially increasing support for independence for the region.
People opposed to breaking away probably won’t vote, so any poll that proceeds will return an unrepresentative and overwhelming result for independence. If Mariano Rajoy is able to snuff out the illegal referendum, it’ll only intensify the demands for another, more official independence vote. Failing to stop it means there’ll be a symbolic declaration of independence.
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