October 2, 2017 / 7:33 AM / 18 days ago

Daily Briefing: Catalonia - uncharted territory

LONDON (Reuters) - Regardless of whether Catalonia’s leaders are right or wrong to defy the Spanish constitution and hold a referendum on independence, this weekend’s images of citizens in a European democracy being beaten by police for trying to cast a vote were shocking.

A man holds an Estelada (Catalan separatist flag) as people gather at Plaza Catalunya after voting ended for the banned independence referendum, in Barcelona, Spain October 1, 2017. REUTERS/Susana Vera

It is still not clear whether this heavy-handed approach taken by Madrid to quash the plebiscite will in some way backfire - strengthening the separatist mood while sullying any moral high ground which PM Mariano Rajoy could otherwise have claimed.

With 90 percent in favour of independence on a turnout of 42 percent, it is now increasingly likely that the regional Catalan parliament will in coming days make a unilateral declaration of independence. Regional leader Carles Puigdemont called on Europe to step in to make sure fundamental rights were fully respected but for now Brussels is maintaining a determined silence.

That could evolve - there is a new attempt by some European lawmakers to get the European Parliament to vote for a debate this evening. After all the ups and downs in its politics over the past year and a half, Europe is once again entering uncharted territory.

British Prime Minister Theresa May faces a party in turmoil at its conference in Manchester. After her botched bet on a snap election lost the Conservatives their majority, May has faced the humiliation of her Brexit strategy being debated in public by her own cabinet ministers, notably Foreign Secretary Boris Johnson.

She tried to steer the conference onto domestic issues with a weekend move to cap tuition fees for students and offer more help for young first-time house-buyers, but judging by today's newspaper headlines (eg Daily Mail: "What A Time To Be Squabbling") that has largely failed. Today her finance minister Philip Hammond takes to the stage to talk about the economy.

Britain's Prime Minister, Theresa May and her husband Philip, arrive at the conference centre on the opening day of the Conservative Party Conference, in Manchester, Britain October 1, 2017. REUTERS/Hannah McKay

And on that matter: Surveys of Britain’s manufacturing, construction and services sectors, on Monday, Tuesday and Wednesday, will be watched even more closely than usual ahead of a Bank of England meeting on interest rates. Manufacturing data is out today at 0830 GMT.

MARKETS AT 0655 GMT

Spanish markets have received a jolt from the violence surrounding Catalonia’s unsanctioned independence referendum on Sunday, with Madrid’s botched attempt to crack down on the voting emboldening separatists and upping the ante in a long-running standoff.  Regional officials say 90 percent of those who managed to vote backed secession, which could lead to a unilateral declaration of independence for a region that accounts for a fifth of the economic output of Spain – itself the euro zone’s fourth biggest economy.

Spanish markets had underperformed euro zone peers through September, but had been relatively calm going into the weekend. But Spanish government borrowing premia over Germany climbed on Monday to their widest level since June and the country’s main IBEX equity index, which contains Catalonia-based banks Sabadell and Caixa, was indicated down as much as 1.5 percent even as the broader Eurostocks index was pointing to a higher open.

For now, the selling appears concentrated on Spanish securities, rather than being read as any systemic question for the euro zone or European Union at large.

Euro/dollar was down about 0.5 percent, although much of that was related to a dollar boost on speculation about President’s Trump’s pick to replace Janet Yellen as Federal Reserve chair when her term expires in February. The dollar and U.S. Treasury yields rose after reports late Friday that former Fed governor Kevin Warsh was one of four names in the frame. Warsh, who was an opponent of the Fed’s extensive bond buying campaign, would be seen as much more of an interest rate hawk than Yellen.

Elsewhere, the economic drumbeat was positive – with Chinese manufacturing surveys indicating an expansion of activity at its fastest in over five years. Following on from Wall Street’s gains on Friday, Asian bourses mostly rose on Monday but Chinese markets themselves were closed. Commodity prices were more mixed. Copper prices were higher from Friday’s close. Brent crude fell back below $57.

editing by John Stonestreet

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