Market Commentary: Markets bracing for Scottish referendum result

The end of August was characterised by volatility that has since subsided since the turn of the month. However, the third week of September has the potential to result in the resumption of volatility. Economic data releases remain the driving force and continue to dictate market direction, however, this week key events are worth highlighting.

Firstly, markets will need to contend with the FOMC meeting tomorrow, which can be a trigger for some edginess in markets. Some market participants are in fact beginning to anticipate an earlier-than expected rate hike on average. Growth numbers have been supportive and inflation has been in line with the forecasts.

Asset markets remain supportive for growth, with lower-than-expected bond yields and healthy asset price gains. Markets will be eagerly awaiting to listen to Yellen’s tone as well as wording, with some analysts expecting her to change her wording from “keep fund rate near zero for considerable time” to “keep fund rate near zero.”

Secondly, the much-awaited Scottish referendum vote comes on Thursday (as markets will still be grappling with and digesting the previous night’s FOMC meeting). The pendulum was swinging in favour of the No vote which served to slightly calm down the investors.

However, over the weekend, the undecided votes continue to remain in the balance, with the outcome expected to go to the wire. Markets view an independence of Scotland as rather unlikely but in case the markets view is wrong it is worth to have a look at possible implications.

A potential independence could cause massive financial turbulences in the UK as it could possibly bring Scotland into a recession, which would be followed by hard austerity. Capital will continue to flow across the border, most likely followed by jobs and tax income.

The markets ought to however pay more attention to the Swiss National Bank's policy meeting on Thursday. The SNB is currently facing a three-pronged dilemma, that of a fixed exchange rate, free capital flows and an independent monetary policy. A central bank is not in a position to sustain all three conditions in an indefinite manner, something that the SNB is taking its chances at.

Loose monetary policy could be inappropriate for Switzerland given the buoyant real estate market, but the SNB is unlikely to adjust the peg in the near-term, especially as the fight against deflation has not yet been conquered, so far. In fact, SNB President Jordan has previously mentioned negative interest rates as "a possible option," with this move unlikely, for the time being, until after the ECB’s Asset Quality Review (AQR) is published in October 2014.

There. Now that’s a pretty decent eventful week to contend with. True, the market seems to be pricy but it is definitely not time to fret.

This article was issued by Calamatta Cuschieri, visit for more information.

The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.

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