Stocks, Bonds Hit By Political Unrest -- WSJ

By Jon Sindreu Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 28, 2017).

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Investors dumped Spanish stocks and bonds after the region of Catalonia declared independence on Friday, in a move that promises further turmoil for the country's markets.

Spain's IBEX-35 stock-market index dropped 1.4% on the day, while the broader Stoxx Europe 600 gained 0.3%, after the Catalan parliament voted to declare an independent Catalan Republic.

Banco de Sabadell SA and CaixaBank SA, two banks with a strong presence in Catalonia, were among the biggest decliners, losing 4.7% and 3.1% respectively.

Investors also sold Spanish bonds, which so far have been hit less than stocks by the crisis, which intensified after Catalan officials staged an unauthorized referendum on independence on Oct. 1.

Yields on 10-year Spanish government debt rose Friday to 1.574% from 1.558% the previous day. Yields on bonds issued by the Catalan government maturing next year rose to 2.493% from 2.313% Thursday. Bond yields move opposite to prices.

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"In the near term, the volatility will probably remain because the issue still needs to settle," said Nicola Mai, a sovereign-credit analyst at Pacific Investment Management Co. He the key risk to watch for would be "significant civil unrest."

But, he added, "I view it as a tail risk."

The euro increased its losses after the Catalan parliament's vote, having already opened lower following the European Central Bank's commitment Thursday to gradually reduce monetary stimulus. The currency was trading down 0.29% at $1.16 in late afternoon trading in Europe.

Friday's vote by the Catalan parliament came as Spain's government pushed ahead with an attempt to take over regional institutions that had been autonomous, such as the local police force.

Analysts say Spain and the European Union are unlikely to recognize Catalan independence, but Madrid's attempts to take over the regional government could spark social unrest. The market selloff reflects fears that uncertainty will be harmful for the Spanish economy, investors say.

"It reflects a negative impact on growth for one of the economies that was leading Europe and could now be affected," said Adrien Pichoud, chief economist at SYZ Asset Management, which has dumped Spanish stocks and bonds since the Catalan crisis escalated in September.

Until July, Spain's IBEX-35 index was outperforming benchmark indexes in Italy, France and Germany on a total return basis. Now, the stocks are the worst performers in this group.

The premium demanded by investors to hold Spanish bonds instead of German 10-year debt -- a widely used measure of credit risk -- also edged up Friday, but it remains narrow by historical standards.

Chris Iggo, chief investment officer of fixed income at AXA Investment Managers, said the ECB's bond-buying program is still providing support to Spanish bonds.

"If the ECB wasn't still buying, who knows where the spread could go," he said.

Still, Mr. Iggo said he believes that "the reaction so far suggests that people don't think this can meaningfully go very far, because they see the Catalan government having very little power here."

Bonds issued by Spanish banks were less affected than their shares. A EUR2.5 billion covered bond maturing in 2021, issued by CaixaBank, yielded just above 0% on Friday afternoon, a decline from Thursday. According to HSBC analysis, 28.7% of CaixaBank's cover pool of mortgages is based in Catalonia.

There were also some moves that seemed anomalous to events. Biotech firm Grifols SA, one of the few listed Catalan companies that has so far refused to move its headquarters out of the restive region, was the top performer in the IBEX-35, rising 1%.

--Christopher Whittall and Mike Bird contributed to this article.

Write to Jon Sindreu at jon.sindreu@wsj.com

(END) Dow Jones Newswires

October 28, 2017 02:47 ET (06:47 GMT)