FOMC stays steady, yet timelines show sharp rate path

• FOMC stays steady, yet timelines show sharp rate path

• Scottish referendum too close to call

The European markets seem somewhat undecided today, with US and Asian gains pushing minor gains in UK and Eurozone indices. Yesterday’s FOMC meeting provided and element for both bulls and bears to grab hold of and as such, the initial gains that saw the Dow reach a record high, soon gave way to a round of selling. That indecision along with the historic Scottish referendum hanging over the UK and Europe means that markets will no doubt be waiting for the result to gauge market direction. Futures point to a moderately positive open, with the FTSE100 +8, CAC +10 and DAX +16 points.

The FOMC chose to remain somewhat steady yesterday and in turn disappointed investors who had been looking out for a change in tone from Janet Yellen. The big question on the lips of the market was whether the Fed would remove the ‘considerable amount of time’ language from their statement and instead provide some sort of timeline for interest rate hikes, much like the BoE has recently. However, Janet Yellen was clearly in no such frame of mind to provide such clarity, instead choosing to remain consistent with previous meetings in stressing the importance of labour market improvements given that there still remains a degree of labour market slack that needs to be used up. This decision to retain a more dovish stance played into the bulls hands, leading many to believe that we will be waiting longer for rates to be affected despite the decision to end asset purchases in October as expected. However, the release of economic projections from the committee provided a somewhat shortened timeline for when we would see rate normalise, pointing towards near enough a 25 basis point rise in the Feds funds rate at each of the FOMC meetings between 2015 and 2017. Thus whilst the bulls cling on to the idea that rates will remain at 0.25% for a longer time, the bears will be highly conscious of the fact that once rates do start to rise, it will be a steep and notable climb to what will become the new normal rate.

The Scottish referendum will finally come to a close tonight, potentially bringing with it and end to the 307 year Union between Scotland and the rest of the UK. A clear tightening of votes between the two camps has clearly caught those within the ‘No’ camp off-guard whose complacency could yet provide one of the biggest shakeups in the history of these Islands. This is personified perfectly by the last ditch attempt at Westminster to devolve powers on spending and taxation up to Scotland in the event of a ‘No’ vote. In essence this is a sweetener which David Cameron has been forced to use to help avert the breakout of the UK. Yet it’s timing, coming within a week of the final vote despite a campaign lasting over two years, could not be more telling. The markets and bookmakers may tell us that it is going to be a convincing win for the No camp, yet the regional polls over this last week have portrayed a race that is neck and neck.

The implications of such a breakup would no doubt be detrimental to the economic and political power of both sides in this matter. The reduction in size and value of the UK economy would of course be reflected in the hand Westminster has to play on the global stage and thus from a purely political standpoint, this devolution will favour neither side in terms of global firepower on the biggest stage. However, such a breakup also has wider reaching implications for Europe who has further regions with aspirations of independence to deal with, in the form of Catalonia, who like Scotland are demanding a referendum of their own. Unfortunately, the decision for Scotland to leave the UK could also mark the beginning of the EU breakup, with Scotland joining the back of the queue for new entrants where Spain and other will be far from keen to allow easy entry for fear of promoting the ease of such a move towards independence. However, would also raise the likeliness of the UK leaving the EU, given the pro-European mindset within a largely Labour dominated Scotland. The future political landscape of the UK would be overwhelmingly conservative and thus without the influence of Scotland, the chance of a Yes vote of our own come the referendum promised by David Cameron would be massively raised.

From the Scottish outlook, this is no doubt a big opportunity to shake things up. It would be a move towards forming all the elements of a fully fledged country themselves rather than relying on London for the provision of core factors such as central banking. However, it would be an absolute shot in the dark for an economy whose biggest export has been predicted to near enough run out in 15 years. An economy built upon dwindling oil and gas reserves strikes me as a dangerous course of action at a time when the difficulty of growing in both jobs and output is perfectly highlighted across the water in Europe which has seen much larger countries struggle despite strong, diversified economies. In a world where there is always someone willing to do something cheaper, Scotland would need to diversify, and quick. The demand for whisky has seen a great rise in recent years and that provides some sort of security, yet to see a Yes campaign driven by pledges on healthcare, spending and taxation without any substance, it doesn’t take a genius to realise that an economy which requires the massive investment to set-up new institutions, coupled with a gradually decreasing resource base, is not necessarily compatible with lower tax and higher spending. The decision is Scotland’s to make and there is no doubt some merit in the idea of independence. However, at a time like this, with a campaign based on foundationless promises, the question remains over whether the Scottish people value stability and growth or self-governance with the possibility of both prosperity or poverty.