It was a down week across the board as stocks, bonds, and commodities all closed lower than where they started on Monday. The S&P 500 was down -1.1%, while the Dow Jones Industrial Average and NASDAQ Composite both fared a little better at -0.9% and -0.3%, respectively. This was the first weekly decline for the S&P 500 in over month, however the index is still up +9.0% YTD.
Treasury yields rose anywhere from 5 to 15 basis points for maturities from 2 to 30 years. Strong retail sales numbers on Friday (which came in as expected compared to August, but saw a healthy +0.3% revision for July) made investors nervous that the Fed could move to raise rates sooner rather than later as the economy picks up. The ten year Treasury saw the biggest gain in yield, up 15 basis points from last Friday to close at 2.61%.
What appeared to be a non-issue just a couple weeks ago has turned to front page news in the international debt markets as Scotland goes to the polls next week to vote on if it will remain in the United Kingdom. Scotland has been a part of the U.K. for roughly 300 years, and while independence has long been talked about it never really seemed to have anywhere near majority support. During the London Olympics in 2012, support for independence was estimated at just about 25%, however now polls show the two campaigns are neck and neck and the vote is far too close to call.
The economic implications of a successful “Yes” vote for independence would be messy at best. How would you divide the current U.K. debt? What currency would Scotland use? What would happen to GDP growth in both Scotland and the U.K.? All of these questions do not have an easy answer and only begin to scratch the surface of what the implications are for dissolving a 300 year union. Think if Texas left the United States, and perhaps that is not impossible to imagine, but the economic consequences of roughly 9% of both a country’s population and GDP just getting up and leaving one day would be profound. The vote is scheduled for next Thursday, September 18th and markets will be watching.
Heading further east in Europe, the U.S. and EU rolled out new sanctions against Russia’s largest bank, the oil industry, and arms suppliers in the latest bid to keep pressure on the Kremlin for its involvement in Ukraine. The sanctions expand upon those that were issued in July and aim to isolate Russia by limiting the access of banks and corporations to the debt markets. Under the new restrictions U.S. individuals and companies are barred from purchasing any debt issuance from the major Russian banks with a maturity of more than 30 days. The oil industry is being limited by denying Russian companies access to technology and services for developing northern shale and sub-sea petroleum resources. Last month Exxon and state owned oil giant Rosneft went ahead and began drilling their first arctic well, but the new sanctions are set to put a halt to this joint venture.
So, remember several years ago when the talking heads started shouting about how the Federal Reserve was going to destroy the value of the Dollar, that inflation was going to run wild and rampant, and the U.S. was going to lose its position as an economic superpower? Well the long term implications of the Fed’s quantitative easing still remain to be played out, but so far the U.S./Dollar doomsday-sayers have been flat wrong. High inflation is nowhere in sight (it’s right where the Fed wants it at +2% YoY), U.S. GDP growth is the strongest amongst the developed nations, and the Dollar has been on a tear this year as it has gained over 5% against a basket of its global peers. The Dollar has gained nearly +2% in September alone on the back of week European growth, pound sterling jitters from the pending Scotland vote, and a Japanese economy that is struggling from the effects of tax hikes earlier this year. And with Russia intent on reliving the glory days of the Cold War the ruble dropped to an all-time low against the dollar on Friday. Even the Chinese yuan is lower than where it started the year against the Dollar.
Around the globe the wind seems to be at the Dollar’s back and that bodes well for the U.S. economy, especially as the Fed seeks to raise rates sometime within the next year. Not only do higher rates make the Dollar more attractive, but a strong Dollar works though the economy in a variety of ways from lower relative commodity prices (commodities are priced in Dollars and become more expensive to foreign buyers as their currencies weaken) to cheaper imports. It will be interesting to hear what the Fed has to say about rates when it concludes its two day FOMC meeting on September 18th.
In other business headlines, Apple this week announced the latest version of the world’s most popular smartphone, the iPhone 6. Two models were actually introduced, the standard phone and a “Plus” model which sports a larger 5.5” screen with full 1080p resolution. That means that the picture on this phone is made up of more than 2 million dots (or pixels). For comparison, if you remember back to the time before you were able to hang your TV on the wall, and before HDTV, the number of dots in those old 27 inch bulky tube screens was right around 300,000. Therefore, in less than 20 years engineers have figured out how to cram almost seven times as many pixels into a space that is 1/5 the original size – and it is portable to boot. That’s pretty amazing.
The most revolutionary part of the Apple announcement this week was a new service called Apply Pay. The service provides consumers with a different way of using their existing debit and credit cards and relies upon a dedicated chip inside the phone which has the sole purpose of storing this information in an encrypted form. Therefore, your cards are not stored in the cloud for eastern European crime syndicates or the NSA to hack into. If you lose your phone, the bank card information stored in it is in theory meaningless as the system requires a user’s fingerprint through the TouchID sensor to access. It will be interesting to see if this new service finally brings mainstream adoption to the area of mobile payments. Consumers are creatures of habit, but perhaps all of the recent data leaks from Target to Niemen Marcus and Home Depot, have finally instilled enough fear to encourage a change. And in a nod to the delivery style of Steve Jobs, Apple CEO Tim Cook also delivered “one more thing” in the form of an Apple Watch.
Next week will be a busy one for the markets, with all eyes on the vote out of Scotland and the FOMC meeting which concludes on Thursday. Additionally, industrial production numbers are out on Monday, some data on inflation (PPI/CPI) will be released on Tuesday/Wednesday, and the index of leading indicators will be published on Friday.
Have a great weekend everyone! Here in Anchorage it looks like the rain is poised to continue.
Senior Investment Analyst