EU Economic Update – 22 September 2014

Continental markets rise following Scottish “No Vote” as Europe breathes a sigh of relief; FOMC also a factor

Continental markets rose from Wednesday last week as what had been a building belief that the Scottish people would vote to stay in the UK became a reality.

When the results came in on Friday morning close to 60% of the Scottish people had voted to remain a part of the United Kingdom, appearing to put the issue of secession rest for the foreseeable future at least, while paving the way for a significant relief rally across UK and European asset classes.

In addition to the referendum, there were other factors that drove equities higher during the week; most notably the FOMC rate announcement and ensuing press conference on Wednesday night.

Here Janet Yellen, Chair of the FOMC, announced a further $10 billion reduction to the pace of asset purchases while indicating that the overall policy outlook remains unchanged. This is that rates will remain at historic lows for a “considerable time” (6-9 months) after the point at which the FOMC’s asset purchase program comes to a close in October this year.

Consequently, developed markets enjoyed considerable support in their recovery during the latter half of the week, with many North American indices reaching record highs once again.

Going forward we continue to expect higher volatility throughout the months ahead as geopolitical risks remain high, while key markets in the UK and the US transition toward a tighter policy environment. Having said this, we also believe that a looser policy environment in Europe will provide a degree of support for continental equities throughout this time.

Nevertheless, we continue to favour a highly cautious approach toward opportunity at present.

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