Weekend Update for September 12

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

ABSTRACT: A moderate shock to the markets followed the latest polling for the Scottish independence referendum, which showed a “Yes” vote to be a distinct possibility. Global investment in the U.K., and the economic stability of the EU, seem to hang in the balance on the Scots’ decision—one expected to have far-reaching fiscal and monetary implications. The precious metals plummeted across the board as the equities markets made late-week rallies to recover their earlier losses.

GEPOLITICS & WORLD EVENTS

IndyRef Movement Gains Steam in Scotland

Although it was largely an afterthought of the Westminster establishment up until this week, the outcome of the Scottish independence referendum suddenly looms large. It seems the Brits’ surprise over possible secession has finally caught the winds of the global media, raising concerns over what a future U.K economy would look like without Scotland. There may be an exodus of foreign investment in Great Britain if indications are that independence will render the Scottish economy unstable.

The potential implications of an autonomous Scotland are many, and remain largely undetermined. An abundant oil supply in the North Sea is Scotland’s strongest ticket toward self-determination. How the U.K.’s gold reserves will be split up is uncertain, as is the proportional burden of the country’s debt that Scotland would have to take on. This past month, the Bank of England made a net addition of 70 tonnes of gold to its reserves, leading to speculation that a split of the U.K. poses considerable financial risk to all invested parties.

On Tuesday, a YouGov poll revealed 51% support for the independence movement, the first time polling had shown the “Yes” sentiment to be ahead. This data sent Westminster into a dither, as the reality of Scotland breaking from the union finally seemed plausible. The pound fell to 10-month lows on the news.

At this point, even if Scotland decides to vote “No” and remain unified with England, the pressure they have applied to the government has made it all but certain that Parliament will grant the Scots greater autonomy by devolving certain rights to them. This is evidenced by the reversal of Westminster’s tune since the ominous poll results were released, shifting from doom-and-gloom-filled ads about the market disruptions and general uncertainty accompanying secession to, now, backpedaling promises of reform coming from Britain’s leading political voices.

Scotland and England have been unified since 1707. The historical and cultural implications aside, the timing is precarious, as the EU can hardly stand to lose what is indeed one of Europe’s strongest economies. If Scotland cannot keep the pound sterling, the process for adopting the euro and gaining admission into the EU takes months. To avoid such a fiscal disruption, Scotland’s two largest banks—Lloyds Banking Group and the Royal Bank of Scotland—have both threatened to reincorporate in London if the referendum passes. The Scottish referendum will be held September 18; at minimum, it has drawn global attention and reignited long-standing movements for devolution in the Catalonia region of Spain and the Basque region of France.

MARKETS

Led by Tech Giants, Equities Recover from Tuesday Tumble

The dollar was strong against weaker commodity prices this week. The yuan hit a six-month high, while the pound remained volatile on uncertainty over Scotland’s future with the U.K.

Global markets responded poorly to a statement from the San Francisco Fed that mentioned the potential for earlier-than-expected interest rate hikes by the Federal Reserve. This exacerbated concerns over “what happens after QE,” sending most equities into a brief tizzy. This has been a recurring theme all year; it would appear that central banks are gauging how the market reacts to rate increase announcements as a stress test of sorts, waiting until the response is more muted before acting.

China’s Hang Seng Index had an awful Tuesday, tanking more than 2%. This marked the worst week for the index in six months. The combination of the Scotland news and the report released by the San Francisco Fed forecasting looming interest rate hikes had the effect of spooking the markets, sending global stocks on one of their worst nosedives in a month. Asian stocks were generally down, continuing their longest streak of sessions in the red in over four years.

After stock in Apple dropped from its all-time high last week on rumors of a security breach of the company’s iCloud, the tech giant was back in force with a tripartite announcement this week. In addition to the simultaneous unveiling of the highly anticipated iPhone 6 and the Apple Watch, even more buzz was generated when the prospect of Apple Pay, the company’s new e-wallet, came to the fore. This new service poses a direct threat to other digital payment platforms such as PayPal. After sliding back below $100 per share, the stock recovered to $101.26 at Friday’s open, as the rest of the stock market was buoyed by Apple’s renewed strength.

Gold and silver continued last week’s slide in earnest, as gold opened at a three-month low of $1,255 on Monday and sat at $1,235 by Friday’s open. After a slight recovery on Tuesday, silver slipped below the $19 mark for the first time since early June. Following the shutdown of South Africa’s (and indeed the world’s) largest platinum mine, the white metal was battered all week, dropping to below $1,360 after closing last week near $1,410. Its Platinum Group cousin palladium followed the trend, plunging from an $891 open on Monday to around $826 by Friday morning.

Each of the major U.S. stock indices recovered on Wednesday after posting steep losses on Tuesday. This came on the news that Scotland’s resolve appears strong ahead of next week’s independence referendum. Many large institutional investors in the U.S. and Europe appear worried that Scottish independence could hurt their investments in Scotland and the U.K. After opening above 2,000 on Monday, the S&P 500 fluctuated within a tight range all week. The Dow opened the week at 17,131.71, briefly slipping just below 17,000 on Tuesday before opening above 17,050 on Friday. Thanks to a surge in biotech stocks, the Nasdaq made up almost all of its losses by midweek after Tuesday’s 40-point loss, erasing a drop of nearly 0.9%.

GOVERNMENT & POLICY

Obama Delineates Plan of Attack Against ISIS, Reaffirms American Exceptionalism

On Wednesday night, President Obama delivered a brief speech outlining the next course of action for the U.S. regarding the terrorist threat posed by ISIL (alternately, ISIS or IS). The Commander-in-Chief was clear that the overarching goal in the Levant is “to degrade and ultimately destroy the terrorist group known as ISIL.”

The president made a series of appeals for international support, emphasizing that “this is not our fight alone.” He characterized the situation as requiring a “broad coalition,” one that “America will lead.” The president added that he will chair a U.N. Security Council meeting in two weeks in order to “further mobilize the international community around this effort.”

Garnering support from America’s allies was an important theme for Mr. Obama, who must combat the notion that for all of his strong rhetoric about the terrorist group ISIL, it still appears to many that the U.S. is merely going to become entrenched in war in the Middle East again.

In an effort to distinguish the current military response in Iraq-Syria to the most recent wars in Iraq and Afghanistan, the president was clear: “It will not involve American combat troops fighting on foreign soil.” He went on to insist that “we will not get dragged into another ground war in Iraq.”

In lieu of large numbers of boots on the ground, the U.S. will rely upon airstrikes and the support of allied forces, while increasing its foreign aid to the region now gripped by turmoil.

In addition to providing training, intelligence, and equipment to Iraqi and Kurdish forces against ISIL, the U.S. strategy will also call for reinvigorated diplomacy. The president pledged for “providing billions of dollars in humanitarian aid” while pointing out that Secretary of State Kerry continues to meet with the newly formed government in Iraq as he promotes unity and supports the new coalition.

Perhaps the most telling words came at the end of his speech, however, when it seemed Obama attempted to activate the American public’s sense of duty and nationalism by framing the military operation against ISIL as a matter of “American exceptionalism” (without using the term itself). Before making his final appeals for support, the president made the following statement:

Abroad, American leadership is the one constant in an uncertain world. It is America that has the capacity and the will to mobilize the world against terrorists. It is America that has rallied the world against Russian aggression, and in support of the Ukrainian peoples’ right to determine their own destiny. It is America—our scientists, our doctors, our know-how—that can help contain and cure the outbreak of Ebola. It is America that helped remove and destroy Syria’s declared chemical weapons so that they can’t pose a threat to the Syrian people or the world again. And it is America that is helping Muslim communities around the world not just in the fight against terrorism, but in the fight for opportunity, and tolerance, and a more hopeful future.” [emphasis mine]

Here, we are given a poetic ode to the idea of American exceptionalism–that the U.S. is fundamentally unlike any other country in the world, which gives it unique blessings as well as unique burdens. The philosophical validity of this perspective notwithstanding, if the president is serious about catalyzing an international coalition to act in accord with the United States, he may want to avoid the rhetoric of exceptionalism in favor of some much-needed humility.

A LOOK AHEAD: A range of U.S. economic data is set to be released on Friday, including consumer sentiment measures, business inventories, and retail sales numbers (which are expected to be strong). While the markets will continue to read the tea leaves regarding the direction of ECB and Fed policies, next week is sure to be focused on the outcome of the Scottish independence vote next Thursday.

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

 

 

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