Scottish Independence give global markets with gitters!
Week commencing Monday 14th September 2014
This week in Brief
In the UK we expect no shift in the voting intentions from the MPC, while the Scottish independence referendum will dominate global markets. In the event of a yes vote, expect severe capital flight from the UK, with medium term GBP projections pointing to a 10 – 20% drop in currency value.
In the US we expect the FOMC to continue to taper while increase their economic and interest rate projections.
In Europe we expect the ZEW to continue to decline as Russian sanctions continue to effect Germany and the Eurozone as a whole. CPI should be an interesting release, however many analysts expect a flat release on the month.
Market Themes & Current Events
Starting in Italy, Italian Prime Minister Matteo Renzi said on Tuesday that economic growth would be flat this year, a sign the Eurozone's third biggest economy is struggling to climb out of its third recession in six years. Renzi’s forecast is far poorer that the government's previous prediction for a 0.8 percent increase this fiscal year. Indeed, the 39 year old has some job to do, given that Italy needs to slash 16 billion pounds in spending next year to keep its deficit at or below the EU deficit limit of 3 percent of output while making labour-tax cuts and maintaining recent income tax reductions. In an almost Godfather like turn, Renzi also announced that Spending Review Commissioner Carlo Cottarelli would likely be leaving his post soon. Although for reason for Cottarelli leaving his post was cited as being for personal reasons, it is pretty clear that the two had a rocky relationship. Since taking office, Renzi has tried to persuade European Union leaders to shift policy away from austerity and toward more investment, whereas Cottarelli on the other had taken a more mainstream European line.
Moving to the US, car sales drive retail sales higher in August, a possible sign that job growth in recent months has led to an acceleration in consumer spending. According to the Commerce Department on Friday, seasonally adjusted retail sales rose 0.6 percent compared with the prior month. Sales are also up 5 percent in the past 12 months, while July sales were also revised upward from flat to a 0.3 percent increase. The figures suggest that American reluctance to spend has faded somewhat, even though their wages have yet to increase. Economically, this is a significant release, and given that consumer spending accounts for 70 percent of the economic activity, we could see a boost in overall economic growth. Unfortunately there were mixed signals from other indicators regarding consumers however. The University of Michigan said its index of consumer sentiment rose to 82.5 in August from 81.8 in July, however much of that increase was due to greater optimism about jobs, rising incomes, and increasing wealth among higher-income groups. Also, the pace of hiring slipped in August after several months of strong gains. All in all however, we have seen a strong week from the US and it is well on track to post some significant growth figures as we move deeper into 2014.
Finally moving back to the UK, Mark Carney has signalled that an independent Scotland will not be able to keep the pound because it will be “incompatible with sovereignty”. He continued compared the prospect of Scotland using Sterling to the problems faced by many European countries that have unsuccessfully adopted the euro. His comments have come as a considerable blow to Alex Salmond, who has insisted that Scotland will continue using the Pound, via a currency union arrangement, in the event of the country achieving independence. All three major UK political parties have however ruled out such a currency union with an independent Scotland. This week’s referendum appears to be closer than ever, and as we draw closer we expect considerable volatility on markets, especially on Sterling and large-cap’s with large Scottish operations. One this is certain, if there is a yes vote this Thursday, expect the economic plan sailing on both sides of the border to be extremely short lived.
GBP This Week
We have a busy week ahead for the UK, with the MPC minutes being overshadowed by the Scottish referendum on Thursday. Starting with the minutes however, with last month’s minutes brought about major volatility as an unexpected shift in voting saw two of the nine committee members vote for an interest rate hike from the current 0.25% to 0.5%, we expect no change this month. We believe we are still some way from actually seeing further dissent in the committed given the general tendencies of the remaining 7 members, who will almost certainly see governor Mark Carney’s outlook for rate rises as the most sensible thing to do. With this in mind, we expect to remain at 7-2 in favour of keeping rates constant, potentially with Mark Carney having provided a timeline of Spring 2015 for a potential first rate hike.
Moving to the event of the week, on Thursday Scotland goes to the polls to decide whether or not they wish to disentangle themselves from the rest of the United Kingdom. This will naturally be an area of deep uncertainty for markets and the UK as a whole, none more so than in Scotland itself. With separation comes an uncertainty as to whether Scotland will remain a member of such groups as the EU, NATO and even the UN. Furthermore, the future of the Scottish NHS, pensions, currency, taxation, defence etc are all basically unknown should there be a yes vote. While the possibility of a yes vote is real, the financial aspect our clients will face is on currency markets. While hard to quantify, we believe the possible effect on Sterling of a yes vote could be in the region of a 10 – 20 percent medium term decline, depending on how quickly both the UK and Scottish governments can find some synergy on the unanswered questions. Preliminary polls held by YouGov and others have shown very mixed swings in the vote, with a recent move towards independence being wiped out in a subsequent survey. While polling is useful, it is important to note that is only looks at a small sample of the population, and thus we expect to see more and more “politicised” polling as we draw closer to Thursday. I cannot stress enough that, given the UK accounts for nearly 4 percent of global GDP, as seismic shock to the country in the form of a separation will significantly impact global markets. This impact is hard to predict, however expect FTSE100 and sterling to really shift as we approach the event. Also, in the event of a yes expect some significant movements across both European and Canadian interests given the existence of numerous pro-independence regions in those areas (Quebec, Catalonia, Venice etc.).
USD This Week
We have a relatively quiet week ahead for the US, with the FOMC minutes the only release of note. We are expecting to see the penultimate taper from Janet Yellen and an emphasis on rate hikes in the middle of 2015. The meeting will also see the latest economic projections from the FOMC, with the market expecting to see some continued upward revisions on growth and interest rate forecasts. This will also be an opportunity for the members to show a more bullish or bearish outlook for the forthcoming period and thus many will take their lead on such matters.
EUR This Week
We have a quiet week ahead for Europe, with ZEW economic sentiment and the final CPI release all on the radar. Starting the ZEW, which will provide an outlook on both the German and Eurozone economies and their respective performance. Given the economic sanctions recently imposed on Russia, we believe that both of these indicators will be reasonably poor.
Moving to Wednesday, the release of the final CPI reading for August has the potential the raise some interest in the markets. We do not expect any shift in inflation this month, predominantly as actions taken by the ECB are unlikely to have filtered into the real economy yet. Any shift lower will probably be put down to that fact, whereas any move higher should be a sign that the deflationary trends are reversing.