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Daily Agenda: Scottish Referendum Outcome Still in the Air

Inflation remains manageable in the U.K.; foreign investment in China drops sharply; German economic confidence wanes.

The U.S. dollar continues to exhibit strength as global policy evolves. With the Group of 20 meeting set to commence this weekend in Cairns, Australia, the big question on investors’ minds is straightforward: If the accommodative policy baton has been passed by the U.S. to the rest of the developed world, when will the financial assets of those nations win favor over U.S. markets in response?

The European Central Bank has shifted to a stance, supported by recent European Union political rhetoric, that will see the name of the game in Europe change from austerity to accommodation in a quest for growth. The case for more action by ECB policymakers was bolstered yesterday by the OECD’s downbeat forecasts for both regional European and global growth levels. Over in Osaka, Bank of Japan governor Haruhiko Kuroda reiterated his commitment to the present course of easing in a speech today, despite rising concerns among some business leaders over the impact of a falling yen on import costs. The Federal Markets Open Committee statement this week is expected to produce no significant shift in rate guidance, but the writing appears to be on the wall for U.S. policy as the economy continues to expand steadily.

With a strengthening currency and tightening on the horizon, common sense would seem to dictate that U.S. stocks and bonds will lose their luster relative to those of economies where the printing presses are in rapid motion, with Treasuries appearing to be the most vulnerable. Investors looking for a canary in the coal mine for this shift in investment regimes may focus on gold, which traditionally has exhibited an inverse relationship with the dollar. Selling pressure has failed to arrive in recent bullion trading sessions, however, potentially indicating that any sea change for market-risk narratives has yet to occur.

Scottish independence referendum still a toss-up. In the lead-up to Thursday’s vote on Scotland’s independence from the rest of the U.K., polling indicates a very close race with a narrow lead by those opposing secession. With concerns over the potential breakaway weighing on the pound sterling, it is noteworthy that today is the 22nd anniversary that the U.K. capitulated to market pressures and withdrew its currency from the European Exchange Rate Mechanism. The so-called Black Wednesday yielded massive profits for speculators including funds managed by George Soros, which were said at the time to have realized gains in excess of $1 billion. Last week Soros published an essay urging Scottish voters to reject independence for geopolitical and economic reasons.

Prices in the U.K. hold steady. August consumer inflation data released by the Office for National Statistics today registered at multiyear lows with the headline index at an annualized 1.5 percent and the food subindex at a contraction of 1.1 percent. Core inflation showed a marginal uptick to an annualized 1.9 percent. This fresh information supports Bank of England governor Mark Carney’s stance that prices remain benign despite accommodative policy measures, providing bank policymakers more room to maneuver.

German confidence wanes. The September ZEW economic sentiment index fared better than consensus forecasts at 6.9, versus 8.6 in August. While, in general, economists polled were less negative than anticipated, the current situation measure dipped to 25.4 from a prior 44.3, as geopolitical concerns cast a shadow over near-term prospects.

Investment flows into China slow down. China Ministry of Commerce August foreign direct investment figures released today indicated a multiyear low for external capital inflows in China. At $7.2 billion for the month, the total was 14 percent lower than the same month last year, following a 17 percent year-over-year drop in August, and the third consecutive monthly decline.

U.S. price index gearing up to leave the factory gate. U.S. August producer price inflation levels are due to be released this morning. Consensus forecasts are for a flat reading on a month-over-month basis for the headline index, as energy costs track sideways. Core prices, excluding food and energy, are forecast to expand modestly for the period.


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