The phrase ‘unchartered waters’ is often overused, especially when it comes to developments in financial markets, but this week sees two events which hold the threat of sending markets very much into the unknown.
The first and main event is the Fed’s meeting on Wednesday and Thursday night our time which could very well start changing the outlook for global interest rates, and currency values for the next year or more, outside of one off or extraordinary events.
And one of those very events happens a day after the Fed’s meeting wraps up – the independence vote in Scotland which will take markets, especially those in the UK and the rest of Europe into areas where no maps, no matter how old, exist to guide what will be a very nervous bunch of investors of all sizes.
The Fed is expected to start showing its hand at this meeting about the future direction of interest rates.
The US central bank is expected to confirm the ending of the tapering of its quantitative easing program by another $US10 billion a month, leaving only $US15 billion to be cut, which should happen next month.
Most interest though will be on how the Fed and Chairperson Janet Yellen characterises the state of the US economy and guidance regarding the timing of the first interest rate hike.
That means all the attention will be on the post-meeting statement to be released at 4 am Thursday, our time.
Currently, the Fed has been saying in its post meeting statements that it anticipates a "considerable time" between the ending of QE (i.e. October) and the first rate hike, with this taken to mean six months or more.
Analysts now expect the Fed to abandon that line by dropping the phrase from this week’s post meeting statement. What it uses instead has led to a rise in volatility, especially in currencies, with the greenback rising and the Aussie (and Kiwi and yen) dropping.
Rising anxiety over the two-day Fed policy meeting and the dropping of the phrase "considerable time" was a primary driver behind US shares ending five weeks of rises, and why the Aussie dollar, Yen, Kiwi dollar and other high yield/commodity currencies fell and why the US bond market sold off and saw the steepest losses for at least two months.
While the US still has low inflation and weak wages growth, with excess capacity in the labour market, economists say the market wants more focus on data from the central bank.
So while the Fed may want to retain the "considerable time" phrase for now, it may try to put a greater focus on economic data to give it greater flexibility if US economic data continues to improve.
The AMP’s chief economist, Dr Shane Oliver says, "Such a move is unlikely to change the timing of the first rate hike though which is likely to be in the June quarter (of 2015), but may cause a bit of market volatility”.
In Britain, though, the big one a day after the Fed’s statement is released.
We get the independence vote in Scotland, or what Dr Oliver nicely called the "Scottish independence madness".
Opinion polls have the result too close to call at this stage, with the ‘no’ vote either slightly ahead, or neck and neck with the ‘yes’ vote.
A string of big companies, led by oil groups, banks such as Lloyds and RBS (and the NAB’s Clydesdale Bank), big investment groups such as Standard Life, and a string of smaller companies have said they will move their domicile south to the UK, to protect their assets, customers and credit ratings in the event of a ‘yes’ vote.
Media reports late last week started reporting on the rise in individual Scots going to England to start new bank accounts to protect their savings or businesses.
Analysts and many corporate leaders say a ‘yes’ vote has the potential to enfeeble Scotland and the rest of the UK, for no real lasting benefit.
"A move to independence for Scotland (which is 9% of UK GDP, 8% of UK population) would ultimately see it worse off than staying in the UK as North Sea revenues are in decline, its population growth is weak (and) its budget deficit would be larger," Dr Oliver wrote at the weekend.
“The transition would involve huge risks for its large financial sector (which accounts for 16% of Scottish employment) as it may not retain the protection of the Bank of England.
"For these reasons a No vote makes sense , but of course this is about more than economics," Dr Oliver wrote at the weekend.
"A Yes vote would have two significant implications.
"First it would raise the level of uncertainty around UK and particularly Scottish assets.
"This is because it would raise a whole bunch of issues around North Sea oil and gas revenue, whether Scotland would take its share of the UK’s public debt, whether it will be able to retain sterling as its currency and the BoE as its central bank and lender of last resort.
"But of course the UK is no longer a major driver of global growth so don’t expect a major threat globally here.
"The second and more significant implication is that it could encourage Catalonia’s push for independence from Spain (with a vote on this scheduled for November 4, although this is not officially recognised by the Spain) which could frighten investors in Spanish bonds and raise fears, albeit I think short lived, regarding the Euro.
"This is the bigger issue to keep an eye on," Dr Oliver wrote.
