Catalan on the cusp but Ibex driven by yields

The leader of the Catalan region of Spain is set to make an historic speech to the Catalan parliament later today and some believe that he may even make a unilateral declaration of independence that could see him get arrested by Spanish police. While there are plenty of people who believe that the Catalan leader, Mr Puigdemont, won’t make such a bold statement today, there are growing fears that last Sunday’s vote could see Spain seize control of the rebel region that could essentially lead to civil war. While such an extreme move as this is by no means guaranteed, the situation remains heated, even though the reaction in financial markets has been muted so far.

The Ibex has managed to retrace 61.8% of last Monday’s decline post the vote, while Spanish 10 –year bond yields have only risen 9 basis points in the past 10 trading sessions, and even after the vote, the 10-year yield only spiked to 1.8%, which is significantly lower than the 7.6% peak at the height of the Eurozone debt crisis. As you can see below, the spread between Spanish and German yields, although rising, still remains at a low level, and is still significantly lower than the Portuguese – German spread. If the markets truly believed that Catalan independence could become a reality then we believe that the Spanish - German spread would be significantly higher.

Yields matter for the Ibex                                 

The Spanish bond yield matters for people trading the Ibex on the back of Catalan fears, since the correlation post the Catalan independence vote between the Spanish stock index and the 10-year Spanish bond yield is a whopping -98%. This means that when the yield moves higher the Ibex is moving lower, as you can see in chart 2 below.

Thus, if Puigdemont’s speech leads to a spike in bond yields, the Ibex could be at risk. Alternatively, if Puigdemont steps away from declaring something as drastic as independence then we could see Spanish yields fall back and a move higher in the Ibex.

Whatever you do, if you are watching the Ibex, watch Spanish bond yields.

Chart 1:

Source: City Index and Bloomberg

Chart 2:

Source: City Index and Bloomberg