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MACRO VIEW COLUMNS: Euro Crisis Trading May Be Due for an Encore

(Bloomberg) — 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
  • Either way, it’s probably going to lead to an increasing clamor for Catalan separation. The seriousness of the situation seems to have been overlooked by many investors, but it won’t be for much longer. The negatives are myriad
  • Divisions within Europe are mounting again. Any success by Catalonia sets a dangerous precedent for other want-away regions, not just in Spain
  • It emphasizes that many of the structural imbalances in the euro zone haven’t been fixed. Inequality is still growing
  • On the back of AfD’s performance in Germany, it’s a reminder that large swathes of the population remain unhappy with the region’s policies. And once again, it’ll be an excuse for euro-bearish financial commentators to hype up the risk from Italian elections next year
  • The beginning of the euro’s impressive rally coincided with Emmanuel Macron winning the French presidential election and thereby quashing political fears in the region. A correction in the euro is now likely to coincide with Spain and Germany bringing those risks back into the light
  • NOTE: Mark Cudmore is a macro strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

To contact the reporter on this story: Mark Cudmore in Singapore at mcudmore8@bloomberg.net To contact the editors responsible for this story: Madeleine Lim at mlim131@bloomberg.net Nick Gentle, Mark Cudmore

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