Caixabank and Banc Sabadell, the two Catalan banks represented in the IBEX 35 index, were down more than 6% in afternoon trading. Three other large Spanish banks (Bankia, BBVA and Santander) were down between 3 and 4%, with the index as a whole trading at a loss of 2.49%.
Italian bank shares were also affected by the escalating tensions following Sunday’s independence referendum in Catalonia, which took place despite a ban by Spain’s central authorities. Milan’s MIB 40 index was down 1.4%, with Italy’s smaller banks suffering the biggest losses.
Spanish bond yields have rallied 16 basis points since the referendum, reaching 1.76% on Tuesday, their highest level in 8 months.
In his speech on Tuesday night, only the second direct address to the nation of a Spanish king since the monarchy was restored in the 1970s, King Felipe accused the Catalan authorities of showing “unacceptable disloyalty towards the institutions of the State”, saying they had “placed themselves outside the law and outside democracy.”
The king did not condemn the violence of Spanish police forces who tried to prevent Sunday’s vote, nor did he make a call for dialogue between the Catalan and Spanish authorities.
Catalan leader Carles Puigdemont condemned the King’s speech on Wednesday, labelling the government irresponsible for not accepting mediation in the political crisis. He also hinted Catalonia would soon declare independence.
Such a step would likely prompt the Spanish government to suspend Catalonia’s autonomy, and to take over the region’s administration. This would further escalate the situation and only put more downward pressure on stock and bond prices.
Investors would therefore be recommended to reduce their exposure to the country until efforts are made to de-escalate tensions.
“Last week we closed every position that has exposure to Catalonia in some of our portfolios, especially in the financial sector like Caixa Bank and Sabadell Bank,” says Alberto Garcia-Cabo Fernandez, a fund analyst at Inversis Gestion in Madrid.”
“Many of our clients have also decided to sell their Ibex 35 positions in the beginning of this week, and some of them have bought put options,” he adds.
When political or macro events occur, asset manager comments usually flood journalists’ inboxes, but not this time around. They have so far been strangely silent about the situation.
“We are watching the situation closely but believe it is too early to comment in any detail on the long-term market implications,” said Allianz GI, the German asset manager.
But perhaps the fact that it’s difficult to frame Spain’s constitutional crisis as an investment opportunity at the moment also helps explain the asset manager silence.