Take 5 and come back tomorrow (12/3/25) Markets Regional financing Defence spending Economy Euro
None of what follows is investment advice.
Market environment: Hope springs eternal – (Asia-Pacific markets were flat with European equities up and US futures pointing higher) – Asia-Pacific markets were flat but European equities rose due to US president Trump seeking to reassure investors regarding growth of the US economy as well as hopes for at least a cease fire in Ukraine. US futures also point higher.
Response to the crisis: Please, sir, I want some more – (Catalonia asks for €8.5bn from the Regional Liquidity Facility (FLA) after approval of a debt haircut of 22% (Cinco Dias p20) – Just weeks after the Government approved a proposal to pardon €17bn worth of Catalonia regional debt, the regional government is back asking for more. This was bound to happen as the haircut was carried out without addressing the problems with regional financing that resulted in the need to create the FLA in the first place. Unfortunately, in the case of Catalonia this might result in more pressure for the central government (which is hostage to parliamentary support from the Catalan parties) to accept a financing system for Catalonia that would improve its finances (mostly at the expense of the rest of regions). This is likely to result both in a worsening of total government finances (as the central government would have to pick up the slack with respect to allowing the rest of regions to continue providing the same level of services) and an increase in the risk of Catalonia secession (as it would be able to collect its own taxes, with full fiscal autonomy being one of the requirements for independence).
Defence spending: The answer to either/or is not Yes – (PM Sánchez guarantees to the leader of the Sumar coalition government junior partner that the rise in Defence spending will be carried out without any cut in social spending (Expansion p33)/The EU propose to spend its increase in Defence spending in Europe (Expansion p32)/The Ecofin resists introducing long term flexibility in the fiscal rules as requested by Germany (El Economista p27) – As I have pointed out, one of the problems with the EU is that faced with any either/or choice (in this case “Guns or butter”) the answer is usually “Yes” (i.e. both). The need to obtain backing from left-wing/Green parties is likely to result in rising defence spending having no offset via lower social/environmental expenditure. So, it’s going to be more debt, as usual. Additionally, given that the increase in defence spending is partly the result of a drive for self-reliance in defence (after the recent “disappointment” with the US’ refusal to continue to allow free riding), spending the funds on domestic production is not so much a choice but a requirement (it would probably be cheaper to buy Chinese, but that won’t fly). And unfortunately, the manufacturing sector in the EU has been under pressure due to increased energy prices as a result of green choices/geopolitics. So, basically, a lot of money is going to be spent on weapons systems with an unappealing cost/quality equation and all of it financed with debt.
Economy: The canary in the coal mine – (Bank of Spain revises up by 0.2pp its estimate of GDP growth for 2025 to 2.7%, but warns of the risk of sharp falls in the markets (Expansion p30)/Bank of Spain credits government spending with up to 40% of GDP growth (El Economista p25) – The Spanish economy is doing well growth wise, but partly on the back of similar factors to those boosting the US (government spending, in this case supplemented by EU funds, and rising immigration). However, as Bank of Spain points out, the positive growth expectations could be at risk due to geopolitical and trade issues which could negatively impact markets and the economy. The performance of US markets, with growing fears of an economic slowdown could be the Canary in the Coal Mine.
Euro: When up is down – (The Euro rises 5.5% this year, on the way to 1.2 to the dollar (Expansion p19) – The rise in the Euro should be good from the point of view of controlling inflation and thus allowing the ECB to lower rates. Unfortunately, lowering rates is likely to be a necessity given that the combination of a rising currency and increased tariff barriers is not positive for the export sector. Additionally, a rising Euro is not positive for companies with international exposure (both via exports and subsidiaries) and the accompanying lower rates is not good for banks. Hardly the ideal situation for Spanish stocks.