BoE minutes may reveal more hawkish tone

Good morning,

• Uncertainties surrounding Scottish referendum, Fed and BoE weigh on risk appetite;

• Lack of key guarantees could lead to comfortable win for better together campaign;

• Fed rumoured to remove key dovish language from this month’s statement;

• BoE minutes may reveal more hawkish tone.

With the week ahead offering so much uncertainty for the markets, it’s no surprise to see US futures pointing to a slightly lower open on Monday. As it stands, the S&P is seen opening 4 points lower, the Dow 22 points lower and the Nasdaq 6 points lower.

The biggest concern for the markets this week is going to be the Scottish referendum and not just because it could bring an end to the 307-year union it has had with the UK. This, of course, is a great concern simply because no one seems to know exactly what impact Scotland’s independence would have on the UK economy. What could be a greater concern though is whether even a close vote could set a precedence for regions in other countries to request a similar vote on independence. We’ve already seen support for the Scottish vote in Catalonia which has long sought independence from Spain and this would be a bigger problem due to how much tax the region generates which is then transferred to other regions.

Regardless of the fact that certain polls that have shown the vote being neck and neck, I don’t expect the final vote to be too close. There is still a huge amount of undecided voters and if Alex Salmond and the pro-independence campaign hasn’t managed to convince them to vote “yes” yet, I don’t think they will. Of course, some will vote in favour but I expect the majority to be put off by the lack of guarantees on key issues including currency, central bank and EU membership. These are huge issues and without guarantees, the risk is not worth taking.

Another concern must be Wednesday’s FOMC decision, with speculation growing that the Fed is going to drop a key sentence from its statement that, until now, has given the markets comfort that the Fed will remain dovish. The commitment to keep rates low for a considerable amount of time after the end of asset purchases is rumoured to be taken out of the statement which may bring forward people’s rate hike expectations.

The release of the Bank of England minutes, also on Wednesday doesn’t help matters, after two policy makers surprisingly voted in favour of a rate hike at the previous meeting. While the MPC did not raise rates at the meeting a couple of weeks ago, any additional votes in favour of a hike could spook the markets and lead some to start pricing in a hike this year.

With so little on the economic calendar today, these events are likely to make investors a little more risk averse. The only notable releases today are the Empire State manufacturing index and industrial production figures and even the reaction to these are likely to be a little muted. The former is seen rising to 16 in September while the latter is expected to show a 0.3% increase as the US continues its strong recovery in the second half of the year.