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Stocks in Europe have had a generally positive open on Monday. While geopolitical risk looks to be on the rise, hopes of deregulation led by the US is helping a risk-on mood. Spanish equities are bucking the trend on Monday, with the IBEX index opening lower as investors react to the Catalonia referendum.
Democracy in Catalonia and global risk
Any functioning free market needs a backbone of democracy. For that reason, the scenes this weekend in Catalonia should send shivers down the spine of anyone with investments in Spain. Spain is right to defend its national interest but apart from being morally wrong, the violent tactics used over the weekend seem tactically wrong. The question of Catalonian independence is now more potent than ever.
Catalan officials have released preliminary results showing 90% of the 2.26m people who voted on Sunday chose ‘yes’ to independence. 43% of eligible voters cast a vote, excluding the ballets that were confiscated by Spanish police.
Were the referendum to have taken place, whatever the result, we were expecting a snapback in the IBEX and other Spanish assets after the dust settled. As it is, the IBEX looks set to continue underperforming other European indices. The heavy-handed intervention by the Spanish state means investors must continue to factor in ‘Catalan independence’ risk into Spain assets.
UK stocks to rise, Monarch goes into administration
UK stocks are set for a stronger open, with Theresa May rebuffing Boris Johnson and holding onto her leadership after the Tory conference.
Airline stocks have jumped on news Monarch has gone into administration. It means all Monarch flights from the UK have been cancelled and the CAA will bring another 110,000 Monarch customers back to the UK. In addition 300,000 future bookings have been cancelled. Listed airlines like EasyJet and IAG should pick up the spoils of the extra bookings. Still, investor confidence in the sector will take another hit so soon after the Ryanair over-bookings debacle.
North Korea tensions running hot
Although not physically present, Donald Trump made his presence felt on Secretary of State Rex Tillerson’s diplomatic trip to China. While Rex Tillerson was emphasising the open lines of communication between Washington and Pyongyang, the President tweeted that Tillerson was ‘wasting his time trying to negotiate.’ Markets have become accustomed to Trump’s inflammatory language and will probably assume Tillerson’s take on US- North Korea relations is closer to reality.
Specifics on tax, deregulation boost US
Wall Street closed higher on the last trading day of the third quarter, marking the eight consecutive quarterly gain for the Dow Jones Industrial average. The prospect of tax reform is still bringing money back into the market. Trump is expected to detail his plans on deregulation in a speech on Monday, which could add some momentum to the recent resurgence of risk-on trading.
More broadly, the low volatility is disquieting. October known for its volatility and as it stands, there has never been a full-year ‘maximum drawdown’ (peak-trough decline) in the S&P 500 ever. For the S&P 500 to get within is statistical norms, a bigger pullback should happen before the end of the year.
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