Daily Agenda: Scotland Goes to the Polls in Independence Vote

Japanese exports remain weak; U.S. housing starts and jobs data released this morning; home prices fall in China.



With the Federal Open Market Committee yesterday reiterating its opinion that it will take “considerable time” before it can tighten monetary policy, investors are now refocusing on near-term geopolitical factors. The Scottish referendum vote is now underway, with polling showing a tight race. This down-to-the-wire drama is a dominant risk narrative for global markets, with repercussions that extend beyond the pound sterling and U.K. risk assets to possible breakaway attempts elsewhere in Europe, notably the Catalonia region in Spain. Meanwhile, European investors are bucking up for the winter by strategizing for the impact of possible punitive Russian actions in the natural gas market.

Japan releases weak export data. Trade data for August released by Japan’s Finance Ministry today registered a 1.3 percent year-over-year contraction, significantly better than consensus forecasts. Total international trade for the month came in at a deficit of ¥948.5 billion ($8.83 billion). Multiple economists note that the geographically diversified production for many key Japanese industries has blunted the impact of a weaker yen on export demand. As the recovery in Japan falters after a modest increase in consumption taxes earlier this year, the administration of Prime Minister Shinzo Abe faces a stark dilemma: With weak export demand, reinvigorating consumption at home is an imperative, but delaying further tax hikes next year will mean delaying addressing the nation’s massive debt-to-GDP ratio.

European Central Bank extended credit falls short. A targeted long-term loan facility initiated by the ECB totaled €83 billion ($107.5 billion) in extended credit, far less than the consensus forecast of €100 million to €300 million. Slack demand among banks for the four-year loans may be attributable to the ongoing comprehensive assessment in advance of the ECB’s ascendency to regulatory control over all lenders in the region. Regardless of cause, unwillingness by banks to take on cheap capital is a disappointment for the bank’s policymakers in their attempt to induce greater private-sector lending. A second facility closes in December.

Home prices in China drop. National Bureau of Statistics of China August data released today indicated a contraction in prices for the month in all but two of the 70 cities covered in the report. The average NBSC national price index has contracted by 11 percent in the first eight months of this year versus the same period in 2013. This indicates that targeted policies by the People’s Bank of China, designed to cool flows of money into excessive property speculation, appear to have had their desired effect.

U.S. jobs and housing starts data to be released at 8:30 am. Initial jobless claims numbers for the week are expected to improve over last week’s spike of 11,000 new claimants. While the long-term trend for the pace of new job seekers continues to be positive, the uptick in the numbers of newly unemployed in recent weeks has caught the attention of investors, as the labor market remains a focus of Federal Reserve policy. July housing start data will also be released this morning with consensus forecasts for a modest contraction after a surprise jump in June to an annual pace of more than 1 million new units.


Gold markets open in China. Today was the first session of trading in Shanghai Gold Exchange open to foreign investors with 40 international banks and brokers providing access. As the largest consumer of gold in the world, the opening of China’s spot bullion market to outside investors is expected to reduce price distortions between levels in Shanghai and those of other markets such as the London Metals Exchange.

Portfolio Perspective: Beijing Takes a Measured ResponseEric Lascelles, RBC Global Asset Management

Chinese economic data has been volatile across 2014. The year began on an atrocious note, before stabilizing. Yet this latest round of economic data has reverted back to a more sour trajectory, with trade flows decelerating, waning iron ore prices and decelerating industrial production and credit growth. Money supply growth has also dipped.

Policymakers are today more cautious about delivering large scale stimulus than in the past, given the aimless, dangerous credit booms that have previously resulted. The 500 billion yuan ($81.2 billion) liquidity injection represents a much more measured response from policymakers as they seek to balance growth and stability objectives. Chinese economic growth should continue to slow, slipping beneath the 7 percent threshold over the next year.

In the end, economic and/or financial disaster in China is still likely to be averted, given the combination of ample national government resources and important structural reforms underway.

Eric Lascelles is chief economist at RBC Global Asset Management in Toronto.