By Dean Popplewell
It has been a long time coming but Scottish nationalists finally get to vote for independent statehood today. A "Yes" or "No" win cannot be guaranteed but rest assured the market will need to brace itself for some sharp sterling swings no matter the outcome. Rumor, innuendo, and early exit polls will be keeping global capital markets jumping throughout the day. Depending on the percentage outcome (smart money has heavily backed a "No" vote), the current tension will either subside a tad or find fresh legs similar to Canada's awfully close Quebec referendum in 1995 that saw the separatists narrowly defeated by a mere 50.58% of the popular vote.
A resurgent U.S. dollar and fear of the unknown in the U.K., has produced significant market volume and volatility. On that note, the trading of the pound picked up considerably in the first half of September. Last week,
Are we witnessing the beginning of another round of emerging market currency vulnerability? Last week saw a very modest back-up in U.S. Treasury yields, and the impact on EM currency markets was markedly negative. The event was by no means as dramatic as last summer's taper tantrum, but the warning signs are clearly evident. As the world gets used to the idea of U.S. monetary policy normalization, the underlying vulnerability of some EM currencies will be revealed. As Warren Buffet would say, only when the tide goes out do we see who has been swimming naked.
Last week's episode was too mild to have an impact on policy, but it was associated with the first evidence of ebbing capital inflow for the EM world. When the tide of hot money is reversed, and capital leaves the EM world, this has a dramatic effect on policy settings. EM central banks -
The FOMC statement was little changed from July. It reiterated that there was "significant" slack in the labor market, despite continued improvement. It repeated that rates would likely remain low for a "considerable" time after the end of QE. It also again indicated that even after the Fed's employment and price objectives were neared, Fed funds would likely remains below the "normal" long-run level. The Fed's economic assessment saw minor tweaks recognizing the ongoing improvement of the economy.
This is largely in line with our expectations and more dovish than the market expected. However, the quick knee jerk reaction read the statement hawkishly. First there were two dissents: Plosser and Fisher. The objections were over the forward guidance. They did not advocate an immediate rate hike (as the two dissents from the Bank of England).
Second, the Fed's dot plot saw a small increase in the Fed funds at the