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Barcelona Eyes Madrid, Markets See Only the ECB

Posted by Joseph Trevisani on Oct 23, 2017 2:25:46 PM

Catalonian separatists promised to counter Madrid's takeover of their regional government, threatening to declare independence this week and accused the central authorities of attempting a 'coup d’état'.

Spain's most dramatic political crisis in 40 years is having almost no effect on the euro, which, though it is down 2.9 percent against the dollar from its 32 month high in September has lost barely 0.5 percent since the October 1st independence referendum. 

Spanish Prime Minister Mariano Rajoy is trying to squelch the independence drive by invoking a never used article of the constitution to remove the regional administration of Carles Puigdemont. Spain's chief prosecutor said that if Catalonia declares independence Puigdemont could face as much as 30 years in jail and immediate arrest. 

Currency markets seem to be assuming that the political fireworks in Spain are more rhetorical smoke than fire and that the dispute will end in negotiation and accommodation.  

The ECB is meeting this Thursday and the likely reduction of its asset purchase program signaling the end of three years of bond buying, negative interest rate and cheap loans and victory over deflation in the euro zone is propping up a currency that is, or should be beset with political woes. 

In addition to the secession of Catalonian political troubles abound in the euro zone. In Germany, Angela Merkel's party won with the smallest vote total in 5o years with the newly formed Alternative for Germany jumping to 13 percent largely on its opposition to Ms Merkel's immigration policies. 

 The Czech Republic elected euro-skeptic Andrej Babis who says the country should not join the euro and must have control over its immigration policies.

Austria's new presumed center right president elect 31-year Sebastian Kurz, will join fellow conservative leaders in Poland, Hungary and Slovakia in challenging EU immigration and economic policies.  

If the change in ECB policies is dominating the foreground in the European market landscape the real threat lies just over the next political hill

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Thomson/Reuters

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