EUR: Politics taking the shine off currency – BBH

Analysts at BBH suggest that back-to-back weekend political developments in Europe have helped take the shine off the euro, alongside the greater confidence of a December Fed hike.  

Key Quotes

“The CDU won in Germany, as widely anticipated, but rather than a new Grand Coalition with the SPD, and now a coalition with the FDP and Greens appears necessary.  It may take the rest of the year to put into place.  At the same time, the cost of the FDP participation, as well as the exposed right-flank of the CSU in Bavaria, could make for a Germany less inclined to push ahead with new post-Brexit, post-financial crisis integration, which Macron as proposed.”

“This past weekend, Spain's Catalonia region went ahead with a secessionist referendum that was ruled illegal by the Supreme Court.  The low-level efforts of Madrid to hamper the referendum and enforce the law, such as confiscating ballots, escalated to outright physical force to disrupt.  The risk is now either a government crisis (where Rajoy, who leads a minority government, is forced to retreat or resign) or a constitutional crisis.”  

“Reports suggest Rajoy is considering invoking a 1978 constitutional article that lets Madrid revoke Catalonia's regional status.  Rajoy's coalition partner, the newly-formed center-right Ciudadanos, supports such action, while the opposition Socialists favor talks with the secessionists, but not taking the more provocative step.  Meanwhile, the Catalonia still seems to be pushing ahead with their independence.  Things may come to a head on October 6, which is the anniversary of the execution by Franco of a leader of the Catalonia's independence movement.”

“Investors in Spain remain fairly calm.  Spanish assets did underperform yesterday but are holding their today.  The 10-year yield is up 1.2 bp today, but that is less than Italy and the core markets, including German Bunds.  Over the past week, Spain's premium over Germany has widened a single basis point.  It is at the shorter-end of the curve that the pressure is evident.  The 2-year yield is up nearly four basis points today, while Italy's yield is slightly lower and the core yields are up less than two basis points.  In the equity market, Spanish shares are slightly lower, off 0.15%.  Over the past five sessions, it is up 0.5%.”