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Catalonia and the Conservative conference

06 October 2017

Have markets reacted to recent events in Catalonia?

Over the past few weeks, tensions have been escalating in light of a movement in Catalonia which is seeking independence from the Kingdom of Spain. It has been an ongoing issue in Spain's modern history and in the past week seems to have reached boiling point. The president of the Parliament of Catalonia called for a secession referendum to be held on October 1st. This was immediately labelled as illegal and unconstitutional by the Spanish government but it went ahead nonetheless.

While the result was unsurprising with allegedly 90% voting for independence (despite a meagre turnout estimated at 40%), the violence surprised many. State police, sent to block polling stations and seize ballot boxes, were met with staunch opposition and responded with force. Catalan officials have said that 844 people were injured and controversial images of the violence found their way into the world media.

The impact on markets has been confined to Spain. Whilst global equity markets have reignited their uptrend, the Spanish IBEX 35 at the time of writing is down roughly 4% this week. In response to the unrest, Banco Sabadell has announced that it will move its headquarters from Catalonia to Alicante and there are rumours that CaixaBank, one of Spain's 'Big Four' banks, is also considering relocation. In bond markets, Spanish debt has unsurprisingly jumped over the last few days, with 10 year yields up from 1.60% to 1.78%.

What is likely to come from the illegal referendum is a deeper and more open dialogue between the Catalan region and Madrid. It is unclear whether the Catalonian government will announce its independence in the coming weeks but this would likely have the potential to deepen the socio-political crisis in the region.

Was there anything to learn from the Conservative conference?

Napoleon once said "I would rather have a general who was lucky than one who was good". Since the general election there have been question marks around Theresa May's leadership abilities. The election campaign slogan calling for 'strong and stable' leadership had the right sentiment. As we enter the Brexit negotiations, the country looks not only for strong and stable leadership, but for a clarity of purpose which, at present, seems to be muddied by infighting in the Conservative party. With Labour calling for mass re-nationalisation and rising in the opinion polls, investors in the UK will look for a strong fight back from the government.

Theresa May's speech at the recent Conservative party conference included important policies on housing and capping energy bills that should be popular with the electorate. The speech even had some good jokes but sadly, partly as a result of a bad cold, the headlines following the event have been more about if she can stay in office until the end of the year or not. Her lack of voice, a comedian handing her a P45 mid-speech and the party slogan letters falling off the screen behind her left her with little more than a sympathy vote. She may well survive this but more because the party cannot find an alternative that they can all get behind.

The Prime Minister has taken the blame for a poor election campaign and tried to move on. Following the divisions of the Brexit debate, it had been hoped that she could pull the party and the country together. The opinion polls, as she called the election, seemed to indicate that she had been successful. Following the election campaign and the party conference, in many eyes, she is now seen not only as a bad general but an unlucky one as well.



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