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No Spanish Fever

02 October 2017 by lberuti

European and world leaders are urging dialogue between Spain’s government and authorities in Catalonia. They said they are worried about the potential for further escalation after a violent crackdown by Spanish police during the independence referendum held over the week-end. With the Catalan parliament expected to declare independence in the next few days, they stressed that talks are urgently needed. The violence that accompanied Sunday’s referendum, which was deemed unconstitutional, also increased investors’ concern about rising euro-area political risks. They leaned against the euro – it was down 0.6% against the dollar today – and put pressure on Spanish debt – Bonos were 10bps wider against Bund at one point -, but the weakness was contained. The Spanish sovereign CDS was 7bps wider at 70bps, but that is a blip rather than a spike, and today’s move was a far cry from the 35bps increase that saw it traded at 135bps the day after the UK voted for Brexit. It was another blatant example of how easily the credit market – like most risky assets - is currently brushing aside any piece of news that has the potential to derail it from its bullish trajectory.