Last week’s stock losses were partly a reflection of investors looking ahead to the two big news events on tap for this week: the Scottish independence vote on Thursday and the Federal Reserve (Fed)’s statement on Wednesday.
Here’s my take on what this week’s major events could mean for investors.
The Scottish Referendum. As I write in my new weekly commentary, over the past two weeks, several polls have suggested a realistic chance that the people of Scotland will vote for independence in this week’s referendum.
While the vote is obviously most important for the U.K., a vote for independence would have broader significance, particularly for the rest of Europe. Given that Scotland is typically more pro-European Union (EU) than the rest of the U.K., Scottish independence could raise the odds of an eventual EU exit by the U.K. It may also embolden other separatist movements, including that of Catalonia in Spain.
For now, I still expect a narrow victory for a continued union. However, a “yes” is certainly possible and would create massive uncertainty, both economic and political, for the United Kingdom and potentially the broader EU. At the very least sterling and other U.K. assets would likely come under additional pressure.
The September Fed Meeting Statement. Market watchers will be paying close attention to Wednesday’s Fed statement for signs of the timing of a Fed rate hike. Our expectation at BlackRock is that there’s a good chance the Fed will change its language, i.e. adopt a less accommodative stance, in next week’s statement, meaning an earlier-than-expected rate hike could be on the horizon.
Last week’s retail sales numbers provided more evidence that the U.S. economy should grow faster in the second half of the year. Outside of household spending, most economic measures – notably manufacturing and housing-related numbers – have been substantially stronger than expected.
The consistently strong data has pushed 10-year yields up to 2.6%, the highest level since early July. The move on the short-end of the curve has also been significant. Following the release of a San Francisco Fed note suggesting that investors may be underpricing the potential for an early hike, the yield on the 2-year note approached 0.6%, the highest level since spring 2011. And the rate rises are likely to continue if the Fed statement provides any signs of an early rate hike.
As such, investors may want to familiarize themselves with these ideas for positioning portfolios as rates start to rise.
Sources: BlackRock, Bloomberg
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock and iShares Chief Global Investment Strategist. He is a regular contributor to The Blog and you can find more of his posts here.