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In October, Spain’s unemployment figures increased by 22.1K, surpassing the anticipated increase of 5.2K. This data pointed to a larger rise in unemployment than analysts predicted.
Trading Sentiment and Developments
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Impact of Spanish Unemployment
The surprise jump in Spanish unemployment is a significant blow, showing a 22.1K increase against a much smaller 5.2K expectation. This is the weakest reading we have seen in over a year and challenges the narrative of a stable recovery that was building through 2024. Consequently, we are seeing immediate pressure on the Euro, which is already struggling at three-month lows near 1.1500 against the dollar.
Given this negative development, we should consider buying put options on the EUR/USD, targeting strikes below the 1.1500 level. This weak labor market data from a major Eurozone economy increases the probability that the European Central Bank will adopt a more cautious tone. Looking back at the sovereign debt crisis of the early 2010s, we remember how peripheral economic weakness historically translated into sustained downside for the common currency.
The negative Spanish data also makes put options on the IBEX 35 and the broader Euro Stoxx 50 index look attractive. Spain’s unemployment rate, which had been improving from its post-pandemic highs above 12% back in 2023, now appears to be reversing course and threatening consumer spending. This raises the risk of earnings downgrades for European companies, especially in the banking and retail sectors.
With this rising uncertainty, we anticipate an increase in implied volatility across European assets. The VSTOXX, the main gauge of Eurozone equity volatility, is currently trading near 18 but could easily test the mid-20s if this sentiment worsens. This suggests that long volatility strategies could be profitable as markets begin to price in a wider range of potential outcomes for the European economy.
