Traders have simply ignored the Catalonian referendum
Spanish economic data may start to see the footprints of upcoming strikes
Investors are busy in factoring the prospects of the dovish Fed
US futures are trading higher as traders have simply ignored the Catalonian referendum (it was called an illegal referendum by the biggest court of Spain). Regardless of its legality, 90 percent of Catalonians have voted for their independence and it is this number which matters the most. We do think that the market is underestimating this risk but traders aren’t paying any attention to this because the game hasn’t changed immediately.
The Catalonian leaders have taken their unilateral action further by opening the door for independence. Over 700 people were injured due to this referendum and now the declaration of independence would only call for more trouble for the Spanish Prime Minister Mr Rajoy. His ultimate goal would be to keep the country united and open the discussion process with other party leaders to avoid any further tumultuous conditions in the country.
The next effect on the euro is negative due to the Catalonian situation and this dragged the currency lower. However, we are not experiencing any meltdown and this is mainly due to the reason that investors are not overly concerned about another debt crisis in the Eurozone due to the Carolinian independence. The chances of such independence to see the daylight are very remote, despite the party leaders would try to push the results of the referendum in the Catalonian parliament.
Having said that, such conditions would undermine investor confidence and it is more than likely that the Spanish economic data may start to see the footprints of upcoming strikes. For the time being, investors are not asking for any major premium for the Spanish bonds as the cost is much lower as compared to the year 2012 when the Eurozone crisis was at its peak.
The Japanese Tankan survey showed that the weakness in the Japanese yen has helped the data. The data was solid and printed the reading 22. It confirms that the business confidence amid bigger manufacturers has improved because of the same reading for the month of June near enough 17. Any weakness in the Japanese yen would further help the Japanese economy. What matters the most is that the Japanese growth has improved and it needs to continue this trend.
As for the US dollar, investors are still busy in factoring the prospects of the dovish Fed and how the tax reform could help the US economy. President Trump would soon have to announce who would chair the Federal Reserve Bank and many do think that he may favour someone who would take a more aggressive approach towards the monetary policy. This very fact is supporting the dollar and we think the dollar is about to get a little stronger especially if Trump appoints a hawkish head for the Fed, and the sterling looks vulnerable.