The Spanish Equity Market is Facing a Key Moment

IBEX 35 closed yesterday at 10.255,70, down 1.21% while the rest of European markets closed with positive numbers. Nevertheless, the Spanish Index is facing a key moment between a strong support which comes all the way from Brexit and the French election gap resistance which can lead to two outcomes.

In the blue circle it can be appreciated the gap originated by the result in the first round of the French elections, discounting already Macron's victory. After that, the index almost reached a two year high but a downward trend was formed in order to close the gap. What first was a support now has become a resistance, since after breaking the gap, the IBEX 35 tested another major support.

This yearly trend line has been only tested twice since Brexit but after breaking the French election gap, the IBEX 35 has been bouncing up and down testing three times already the resistance and support in a margin of a month. This just highlights the uncertainty on wether the Spanish index can finishs its correction and continues going up or a major downtrend breakout is forming influenced by the instability caused by the Catalonian Independence.

Apart from the trendlines, the index is already below the 50 and 100 MAs, but yesterday's closing price was on the edge with the 200 MA. This 200 MA, for now, is acting as a support along with the long Brexit trendline. Anyway, in case the index breaks below the 200 MA in the upcoming sessions, it will just strengthen the downward breakout leaving room for a downtrend while the Catalonia situation still need to be resolved. To all these indicators it is also necessary to take a look at the Spanish 10-year bond yield.

A monthly triangle pattern was formed which was broken from above days before the 1-O referendum, retested by the end of last week and, finally, after Sunday's outcome, jumped to 1,7%. It can be appreciated how all this rise in the Spanish 10-year bond yield, since testing the support, has been in line with the downward trend of the IBEX Index.

Hence, from this point of uncertainty, companies have taken different positions regarding the possible outcome.

• Companies like Moody's believe that it is "unlikely" that Catalonia will declare itself independent and thinks that the most possible outcome of the current political tensions will result in a new agreement between Madrid and Barcelona.

• The analysts of Société Générale deepen in the uncertainty generated by the Catalonian conflict: "We believe that a unilateral secession is very unlikely, but we do not see quick solutions either: both sides are radically opposed and tensions could increase in the coming days if there is a declaration of independence." With this scenario, the French bank embraces caution on the evolution of the Spanish stock market: "The combination of a government in minority (PP in the Spanish Congress) and the campaign for Catalonian independence could prevent Spain from making its very needed reforms, so we remain cautious regarding Spanish equities. "

• Other banks, such as Bank of America Merrill Lynch, believes that the worst-case scenario for the markets has arrived. "Last week we said that markets should be more concerned about the referendum if it had implications for the sovereign rating [S&P decided on Friday not to raise the note to Spain], if we saw violence and if it had consequences for the political stability of Spain. conditions have been fulfilled." According to the American bank, whose analysts in London are among the most pessimistic in the City because of the situation in Catalonia, "after the recent events there is little room for finding a negotiated solution. The Catalonian government could declare independence unilaterally and the Spanish Government could take control of the region. "

For now, there is not signs of an immediate agreement between the Spanish President, Mariano Rajoy, and the Catalonian Independence leader, Charles Puigdemont, leaving more space of instability and uncertainty between Madrid and Barcelona in the short term. Although, beyond the short term, the Spanish stock market has arguments to deal with bearish pressures, according to Bernstein analysts. In this sense, they point out that the profit valuations of Spanish companies are below the average in Europe.