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Sweet spot for markets

IF SCOTLAND had voted 'yes', then many were predicting this could have been the 'butterfly flapping its wings in the Amazon jungle' that led to the long-awaited crash in equity markets and rise in volatility that has been curiously absent over the course of this summer.

The converse is therefore now true; with this tremendous source of uncertainty removed, equity markets can resume their upward march, driven on by excess global liquidity- the US Federal Reserve may be turning off the taps, but the Bank of Japan is flooding the markets with money and the European Central Bank is moving inexorably towards quantitative easing (QE).

Thursday's lacklustre targeted longer-term refinancing operations uptake has shown the flaw in the ECB's strategy - banks may not voluntarily access the ECB's new four-year loans, especially if they don't envision end demand for loans from non-financial enterprises.

This attempt to raise the size of the ECB's balance sheet by 'passive' means will surely fail and eventually will be replaced by an 'active' policy, i e QE as we know it, à la Fed, Bank of England, Bank of Japan.

I therefore now expect a full explosion of animal spirits across markets, with the pound and dollar flourishing, as they would have done without the threat of mayhem inherent in the risk of a Scottish 'yes' vote. The euro and the yen are looking especially weak.

Read: Pound hits two-year high on Scotland results

BoE Monetary Policy Committee members will be more relaxed and tighten their fingers on the rate rise trigger, mirroring the subtle move in sentiment shown by this week's new Summary of Economic Projections from the Fed, with its exiting new dot dispersion.

This is now a sweet spot for markets, especially given the backdrop of reduced Ukrainian tension.

Now read: High-flying dollar slips in Asia

 - Fin24

*Nick Beecroft is senior market analyst at Saxo Bank.

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