Markets Await Fed Signals and Scottish Vote

European and US stock indices ground lower all week, commodity prices fell and the dollar only strengthened as global markets prepared themselves for next week's Fed meeting. Anticipation is building that the FOMC will make material changes to the way it talks about its policy exit. On Tuesday, CNBC's Fed watcher Liesman said there was a good chance the Fed could alter or drop its "considerable time" language next week, as both hawks and doves have been increasingly critical of "date-based forward guidance" versus an economy-driven policy. In Europe, attention has been squarely focused on the upcoming Scottish independence referendum as for the first time polling data has shifted enough to make a UK break up a distinct possibility. In Japan, the final reading of Q2 GDP showed the measure to be even worse than the first go-round, raising hopes the BoJ may ride to the rescue after all, helping the Nikkei gain 1.5% on the week. For the week, the DJIA fell 0.9%, the S&P declined 1.1% and the Nasdaq slipped 0.3%.

UK financial markets and the pound have been unhinged by poll on the Scotland independence referendum on September 18th. A poll out last weekend put the "Yes" (to independence) camp ahead of the "No" option for the first time, driving a sharp selloff in the pound, banks and energy companies with North Sea operations. Later polls showed the "No" vote ahead, however in each case the "undecided" vote was 10% or more, making it too close to call. If Scotland were to secede, there would be elaborate negotiations to sort out the new nation's currency, how existing debts would be divvied up between Scotland and England, and much else besides. GBP/USD hit nine-month lows around 1.6050 mid-week.

The 10-year yield drifted higher all week, pushing above 2.60% on Friday, its highest level in nearly two months. USTs followed yields higher in Eurozone, while plenty of new supply sparked selling, a setback from the roaring market in 2014. Selling was also driven by jitters about Fed policy.

The ceasefire holds in Ukraine, despite ongoing reports of breaches by both sides. Ukraine President Poroshenko has gone to great lengths to emphasize the need for diplomacy in resolving the conflict with Russia, and even agreed to delay trade sections of EU-Ukraine Association Agreement until the end of 2015 in order to assuage Moscow's feelings. The US and the EU launched a second round of sanctions on Russia, restricting access to its financial markets and punishing various banks and energy companies.

On the commodities front, both gold and oil futures have continued to fall lower this week on a variety of factors. Gold futures fell to the lowest point in eight months this week as continuing improvements in US economic growth plus the strong dollar curbed demand for the metal as a haven asset. But it is the increasing likelihood of higher interest rates that is ultimately cutting gold off at the knees. Over the last month the WTI futures plummeted to eight-month lows around $90.50 as of Thursday from around $98 in early August, driven by the easing of some geopolitical conflicts and renewed dollar strength. WTI fell 1.1% on the week, while Brent has fallen even harder, down 3.7% on the week, dropping below $100 for the first time in about a year.

Apple unveiled its new, larger iPhone 6 and 6+ models and its highly anticipated Apple Watch device this week. The new iPhones have larger 4.7" and 5.5" screens, and as of Friday the large screen model had already sold out online. Reports suggested Apple could ship up to 80M iPhone 6 units by the end of Q4, making for its biggest quarter of sales ever, by a broad margin. The Apple Watch received somewhat mixed reviews, however it will not launch until early next year.

Demand for Chinese e-commerce giant Alibaba's IPO was so strong that the underwriters closed their books early and will likely raise the price range to around $70/share from the initial $60-66/share range. The final IPO pricing is expected on September 17th with trading to begin the next day.

The dollar rally continued this week, with the trade's center of gravity shifting from low-yielding to high-yielding end of the currency spectrum. EUR/USD was around 14-month lows after testing 1.2860 on Thursday. EUR/CHF ticked up off the 1.20 floor after the SNB's Moser reiterated that the SNB could implement negative interest rates if the floor was under threat. A weaker Yen supported Japanese markets (Nikkei closed at an 8-month high) with USD/JPY at 6-year highs above 107.35 in the week.

China's August economic data suggested a more benign slowdown than feared last month, diminishing the likelihood of broad PBoC easing. Imports fell for the second consecutive month, but the trade surplus hit another record high of $49.8 billion, well above the $40 billion expected. August new yuan lending was also marginally above consensus at CNY702.5B, alleviating credit sector concerns after July lending fell to its lowest levels since early 2010. August CPI did hit a four-month low of 2.0% and M2 money supply grew at a 5-month low pace of 12.8%, but the PBoC said overall money growth is still within a reasonable range and on track to reach 13.0% target this year.

Japan Q2 final GDP showed an even bigger contraction than initially estimated at -7.1% annualized. Private consumption was particularly soft, falling 5.1% on reduced spending following the April sales tax hike, but the biggest downward revision was seen in corporate capex, which was cut to -5.1% from -2.5%. On Thursday, Bank of Japan governor Kuroda and PM Abe held their first direct meeting in 5 months, boosting speculation that the cabinet will call on the central bank to do more heavy lifting on monetary policy as it faces increased pressure to increase sales tax again next year.