I woke up this morning with a phrase rattling around my head. All I could think of while getting ready and making my way into the office was “those who hate the calm, know nothing of the storm”. That those of us who thumbed our noses at the quieter periods of life for being disinteresting will receive a sharp wake up when the clouds start to roll in. For the pound, the clouds are already here, brooding above us.
The first opinion poll of the Scottish Referendum that has shown a lead for the separatist ‘Yes’ campaign was released this weekend. Yougov’s poll showed that 51 per cent of those polled would vote for an end to the union; in January, polls asking the same question had less than 35% of those polled making the decision to separate. The market uncertainty around this issue was never really a factor until the polls got close last week. This weekend’s poll means that there will be little else on the radar for sterling watchers in the coming 10 days.
Once again we reiterate our view that we hope the union remains as it is but even should the ‘No’ camp triumph it will a very hollow victory. The nature of the relationship between the political village of Westminster and the Scottish populace has been irrevocably damaged as part of this campaign and will need a stronger focus from policy makers moving forward. A ‘yes’ vote sets a fire under separatist arguments across the European Union. You can bet that those looking for independence in Catalonia or in Belgium will get the campaign banners out soon regardless of the result.
The eventual outcome will have a huge effect on monetary policy arguments this term as well. A vote for independence would hammer any near term expectations of an interest rate increase and we would likely shift our thoughts back into Q2 of next year.
The sterling effect is obvious and we would reiterate that the market remains under-priced of the risk. While a bounce back for the pound would now come from a ‘no’ vote, larger losses are queued up following a vote to leave the United Kingdom.
Friday’s payrolls data came as a bit of a surprise to market participants. The US economy gained only 142,000 jobs in August, the fewest since December of last year and below all estimates put forward by economists and analysts. The unemployment rate fell to 6.1% as a result of an unexpected decline in labour market participation. Some are looking at this number as an outlier, something not in keeping with the recent numbers from the US economy. We know that consumer spending is weak as we head into Q3 and any further damage to the sentiment picture will knock back Federal Reserve thoughts on interest rate movements.
That being said, the USD remains very well bid especially against GBP, EUR and JPY. EURUSD opened up below 1.30 and, in the absence of real European data through the course of this week, will find it difficult to rebound in the short term. I think there is still a fair element of the market working out just how large and effective Draghi’s latest plans for the Eurozone economy could be and whether they will in turn lead to more sovereign QE later down the line.
Increased stimulus is once again being talked about in Japan this morning as its economy continued to show large signs of fiscally enforced contraction. GDP shrank at an annualised rate of 7.1% in Q2; it was revealed overnight. Another sales tax increase is expected in just over a year’s time and we can see what the 3% rise in April has done to growth, confidence and spending. More stimulus is expected by the end of the year from the Bank of Japan and we maintain our expectation that yen will weaken into 2015.
Have a great day.