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Catalan independence suspension awaits Madrid response

European stocks had a fairly lacklustre day yesterday ahead of last night’s speech by Catalan President Carles Puigdemont to the Catalan parliament, where he said that he would suspend the declaration of independence to allow for further talks with the Spanish government in Madrid.

European markets look set to open higher as a result this morning but with a response yet to come from the government in Madrid that could change.

It could be argued that Puigdemont blinked last night, but his assertion that the ballots showed a “yes” vote and was a mandate for independence nonetheless has raised the stakes and put the onus back on the Madrid government as to whether Prime Minister Rajoy would dare trigger article 155 of the Spanish constitution and suspend the authority of the Catalan parliament, without a sure fire way of implementing it, given the split loyalties of the local Catalan police force or Mossos.

It would appear that politicians in Catalonia are hoping to force some form of mediation, despite Madrid’s insistence that Spain is “indivisible” and that the referendum was illegal. With the EU turning a blind eye on what they call an internal matter, despite the use of violence on voters by Spanish police, tensions are likely to remain high.

Pressure has been building on Catalan politicians for several days now as businesses and banks take pre-emptive action in securing their operations, and that could well have prompted last night’s more cautious approach. Whether it has any effect is another matter, but the Spanish government would be unwise to stick their heads in the sand on this one having miscalculated in respect to its response to the initial ballot.

Yesterday Donald Tusk the President of the European Council urged Mr Puigdemont that “the force of dialogue is always better than the argument of force”. Wise words indeed, but as with any dialogue or conversation there has to be someone listening and irrespective of the rights and wrongs of recent events, there doesn’t appear to have been much of that from politicians in Madrid in recent days.

For now the mood music coming from Madrid doesn’t appear too promising with cabinet meetings and consultations to be held later today between government ministers, and other parties, with respect to a response.

Last month the US Federal Reserve outlined its plans to begin the runoff of its $4trn balance sheet beginning this month at a rate of $6bn per month for US treasuries, and $4bn per month for mortgage backed securities, as policymakers continued to condition the markets for further tightening measure in the coming months.

The latest FOMC minutes which are due to be published today should give us extra insight into the Fed’s thinking particularly in terms of the overall discussion about the pace of balance sheet reduction at a time when the Fed is falling well short of its inflation target.

Fed chief Janet Yellen admitted during her press conference that Federal Reserve officials were puzzled as to why inflation isn’t higher, particularly since on the Fed’s preferred measure it is at its lowest level in over 2 years, while according to ISM surveys it is at multiyear highs.

Last week’s payrolls data added another string to the discussion after wages data unexpectedly jumped to 2.9% in September, while unemployment dropped again, to 4.2%.

This is the conundrum facing Fed officials, and today’s minutes could well add some colour to the FOMC’s deliberations, and whether there was a discussion or a fear that prices might start to rise more quickly than they are able to react.

The pound has managed to remain fairly resilient despite the continued political breezes coming its way in the past week or so. Yesterday’s talk of alternative trade plans in preparation of a possibility of a no deal scenario while creating a lot of political noise didn’t appear to have caused much of a ripple on currency markets.

EURUSD – found support at the 1.1670 area last week, and now needs to push beyond the 1.1830 level for a return to the 1.2000 area. While below the 1.1830 area the risk remains for a move back to the 1.1670 level on the way towards 1.157, and potentially lower.

GBPUSD – found support at the 1.3020 area last week and has rebounded quite strongly but we need to get back through the 1.3320 area to signal a retest of the 1.3420 area. We still remain in the broader uptrend while above the 1.3000 level and a return to the highs last month.

EURGBP – ran out of steam just below the 0.9000 area and the 50 day MA at 0.9020. We now have support back at the 0.8900 area and below that at the 0.8820 area.  

USDJPY – last week’s failure at the 113.40 area has seen the US dollar slip back though it did find some support just below the 112.00 area. The risk remains for a move back to 114.00, though we might see a dip to 111.30 first.

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