###POV: EUROPEAN MARKETS OVERLY COMPLACENT ON....>

EU: ###POV: EUROPEAN MARKETS OVERLY COMPLACENT ON CATALAN RISK.

- Despite volumes and volatility falling ahead of Christmas, there remains

significant event risk in Thursday's Catalan elections, which are expected to

result in a hung parliament. Metroscopia polling last week predicts unity

parties gaining 62 seats and pro-independence parties gaining 63, meaning both

factions would be short of a majority (68 seats). However, polling momentum is

in pro-independence parties' favour and the likelihood of a separatist majority

is now seen at approximately 50%.

- Both Spanish bonds and the Euro have traded well: the 10yr SP/GE yield spread

has tightened by circa 20bps since October and the EUR's done very little.

- While a unilateral bid for independence is becoming more unlikely, Madrid are

likely to receive onerous reform terms and autonomy demands, prompting domestic

political instability and, potentially, further political & fiscal fragmentation

in Spain. This may result in higher government bond yields and more pressure on

the EUR. Results are due a few hours after polling closes at 1900GMT, with final

results expected by 2200GMT.