Market Drivers for September 09 2014

Latest Scottish vote shows gap narrows to 1%
UK MP/IP better but TB is worse

Nikkei 0.28% Europe -.29%

Oil $92/bbl

Gold $1254/oz.

Europe and Asia:

AUD NAB Business Confidence 8 vs. 10

GBP UK MP 0.3% vs. 0.3%

GBP UK IP 0.5% vs. 0.2%

GBP Trade Balance -10.2B vs. -9.1B

North America:

CAD Housing Starts 8:30 AM

Dollar hit 16 month highs in steady Asian and early European trade with USD/JPY hitting levels not seen since 2008. There were no specific fundamental triggers to push the greenback higher. Rather its strength stemmed from the weakness of the other majors with EUR/USD especially plumbing fresh yearly lows at 1.2858.

The EUR/USD was hampered by comments from German Finance minister Schaeuble who noted that German economic outlook has clouded over. Mr. Schaeuble stressed that the other EU members stability oriented policies and maintain balanced budgets. It is clear that Germans will continue to resist any dramatic policy initiatives at stimulus in the EZ, but the situation in the region continues to deteriorate with many member nations on the cusp of recession. As of now the biggest stimulative effect comes from the declining currency which should help boost export demand over the next several months.

Meanwhile in UK, all eyes were focused on Scotland where the latest polls showed that the independence referendum was separated by only 1% between the Yes and No votes. However nearly a quarter of the population remained undecided and the end results are far from certain.

Cable found a modicum of support at the 1.6100 level after taking a massive drubbing yesterday. Some analysts continue to predict a doomsday scenario for the currency if Scotland votes Yes with Nomura suggesting that the unit could fall by as much as 15%. We remain sceptical of such a scenario, unless the Scottish vote unleashes broad based movement for fracture across the whole Eurozone.

In the meantime the economic data proved mildly supportive for cable with Manufacturing Production matching estimates at 0.3% while Industrial Production rose to 0.5% from 0.2% eyed. The only blemish on the economic record came from the Trade Balance data which saw the deficit expand to -10.2B vs. -9.3B forecast.

Volatility in pound options has risen to its highest level since 2011 and is likely to remain elevated until the vote of September 18th. The pair remains vulnerable to further selloffs especially if the Yes vote pick up more momentum over the next few days, but as we mentioned yesterday if the political risk evaporates sterling could see a very sharp short covering relief rally.

In North America the calendar is once again barren and the focus will likely shift to Apple’s new product announcements. The company is such a behemoth in the US stock market right now that investor reaction to its announcements will likely drive in all the US assets today. USD/JPY has continued to perform well holding above the key 106.00 level as optimism about US relative growth and the prospect of further QE from the Bank of Japan has pushed the pair above the 106.00 figure for the first time since 2008. If Apple strikes a cord with US investors helping US equities rise,USD/JPY could see 106.50 as the day progresses.

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