Three possible outcomes of the Catalan crisis and how to trade them

The referendum in Catalonia registers 90% of the vote FOR independence. In fact, less than half the citizens of Catalonia go to the polls. On the other hand, Spanish Prime Minister Mariano Rajoy announced that there was not have a referendum.

In this article, we will look at how Spain and the financial markets will react if Catalonia declares independence in the coming days.

1. Enacting of Article 155 of the Spanish Constitution
If Article 155 comes into force, the constitution will allow the central Spanish government to withdraw the autonomy of Catalonia, in part or in full. The introduction of Article 155 can be accepted if Catalonia fails to comply with the laws laid down in the Constitution or acts in a way that seriously damages Spain's interests.
This will have a very negative impact on the European currency and positive for the indices. In this case, we expect the downward movement of Spanish IBEX 35 to be maintained, as mass protests and disasters are expected in Catalonia.

2. Military status in the area
The Spanish government can use the military to take direct control of the Catalan region. This option would be very unlikely, especially after the police violence on the Catalan citizens during the vote. If the Spanish government declare a state of emergency and deploy its troops in the region, then the economy will still be dominated by Madrid, but experts say it will undermine democracy in Europe and lead to many protests.
Declaring marital status will have a severe negative impact on the Spanish IBEX 35 and a short-term downward impulse in the euro.

3. Negotiations between Madrid and Catalonia
Rajoy is categorical that he will not discuss the illegal referendum that seems to lead to negotiations with the Catalonian government "under the table". The two leaders could accept third-party mediation to create new relations between Catalonia and Spain, mostly through a constitutional change.
This option is probably the most optimistic at the moment and would have the slightest impact on the euro. On the Spanish IBEX 35, we expect the index to rise sharply reflecting the willingness to resolve the conflict peacefully, and consequently how the negotiation moves can expect both growth and decline.

Source: Bloomberg Pro Terminal

Jr Trader Petar Milanov

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