Robeco: Escalating tensions in Catalonia

Main market events

Except in Italy, peripheral spreads have widened this week, against a backdrop of escalating tensions in Catalonia. During the recent EU Summit in Brussels, European leaders expressed their support to the Premier Minister Rajoy in his handling of the conflict within the Spanish constitutional framework. Italian bonds have returned 0.76% this year, Spanish bonds 0.50%, Portuguese bonds 10.66% and Irish bonds 0.85%.

Spain

The Catalan Premier Puigdemont has remained ambiguous in his answer to Madrid this week regarding his intention about a unilateral declaration of independence. As a result, the central government is left with no other option but to activate Article 155 of the Constitution. An emergency cabinet meeting is set on Saturday to propose a package of measures, which will be presented to the Senate by the end of the month. The approval by the Senate should not be an issue given the majority of the PP party in this Chamber. Rajoy will then be in a position to dissolve the regional parliament and call for early elections in Catalonia. He will also be able to take the control of the regional institutions. In retaliation, the pro-independence parties are threatening to pass an unilateral declaration of independence, as their call for European mediation failed. Political strains between Madrid and Catalonia are not likely to recede in the coming days, especially if the central government continues to arrest Catalan leaders. 

Italy

After the approval of the new electoral law in the Lower House, the next election in Sicily on 5 November will be a key test for the general election next year. The new electoral law aims at allocating 37% of the seats on a first-past-the-post basis and 63% proportionally. This tends to favor parties with concentrated support in certain regions, like the Democratic Party. That said, according the latest poll, the centre-right coalition and the anti-establishment M5S stand neck to neck in the Sicilian regional election. This is because the candidates of the centre left parties are divided and will run separately. In the meantime, two referenda in Lombardy and Veneto will take place this Sunday. While their legal consequence will not be immediate if the Yes wins, the short-term impact could well be to provide support to the Northern League.

Robeco Euro Government Bonds 

We have maintained the underweight position in Italian government bonds as fundamentals remain weak and political risk is still high. The market also has to adjust to the gradual phasing out of the ECB’s bond buying program. We increased the overweight position in Spanish bonds after spreads widened amid ongoing political turmoil between Catalonia and the central government. We remain confident that current tensions will not harm the strong Spanish fundamentals. Currently the fund is 42% invested in peripheral bonds compared to 40% in the index. Year-to-date the fund’s absolute return is 0.03%^(*). (* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, October 19, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.)