Global Macro Commentary

Anti-Globalization
Wednesday, September 10, 2014
Guy Haselmann
(212) 225-6686
Director, Capital Markets Strategy

John Zawada
Director, US Rate Sales



Anti-Globalization
Financial markets are being pushed and pulled by a variety of cross-currents. Much of the
turbulence unfolding is the culmination of imbalances and tensions that have been brewing for
many years. Amplified volatility in FX and commodity markets are warning signs. They appear
on the cusp of spilling more broadly into other markets, exposing the full size of the iceberg.
The current environment is distinct from the period of 2009-2013 when governments and central
banks were quasi-coordinated in providing gargantuan amounts of stimulus, and when the geo-
tensions were only chirping modestly. This year, governments and central banks have focused
more generally on domestic issues. This is good in theory, but it has splintered coordination
into a quasi-fracturing of the global monetary system.
It should be widely known by now that past stimulus measures have ballooned sovereign debt
levels and pushed official interest rates toward the zero lower bound; while other policies and
regulatory changes have prodigiously distorted and manipulated asset prices and the cost of
money. Stimulus, however, is no longer a one-way street.
Diverging policies serve as a trigger for capital flow movements. They are shaking the
foundation of capital markets, which in turn is causing second order effects like a mini-
contagion. In addition, new and ever-evolving rules for investing and financial transacting have
had a deleterious impact on market liquidity that will make the swishing capital flows even more
magnified and treacherous for financial markets.
For several decades, the global economy has benefited from globalization made possible by
technological advancements. Technology has shrunk the world by being able to access more
markets, and move capital and goods more efficiently. Political change (e.g., fall of the Berlin
Wall) has mostly created larger and more market-friendly policies. The changing landscapes
unleashed innovative capacities that typically provided great benefits and opportunities. While
these factors will continue to exist, they are being met with the strongest headwinds in decades.
Protectionism, nationalism, and separatist movements could begin to have great negative
impacts. The social contract between people and governments has been breaking down, as
witnessed in voting booths and through violent protests. Going forward, portfolios could begin
to be impacted, as they activate large capital flows between sectors, securities, asset classes, and
geographic regions. Investors are probably ill-equipped for a market shift from a state of low-
volatility and herd-mentality investing, toward one characterized by greater bifurcation and a
sustained spike in volatility.
Markets have largely ignored the wars and tensions occurring in the Middle East and elsewhere.
This is because, while everyone recognizes the tragedies occurring at a human level, investors
realize that most disputes are far away with little effect (so far) at the investment level. In
addition, troubles abroad can mean capital inflows for the US (a cleaner dirty shirt).
A successful Scottish independence vote next week could be the game-changer. Until earlier
this week, most believed there was no chance of Scotland breaking from the UK. Even after a
flip in one poll showed a 1 point advantage for the yes campaign (for independence), most still
assumed that it would not occur because they assumed that fear of what it would entail would
prevail. The no camp fuels the fear by labelling such a scenario as an act of madness.
However, in all likelihood, a vote for independence may not be as far-fetched and radical as the
no campaigners suggest. The transition into independent statehood could actually go fairly
smoothly with particulars negotiated in a fair and level-headed manner. There will be initial
costs, but for supporters, pride trumps (unknown) costs. Fear about using the British Pound is
also over-hyped as the Pound is a highly tradable freely-convertible currency. Moreover,
Scotland could set up a currency board monetary authority in less than one day.
The arguments and grassroots campaign of the yes camp has been superior in most aspects to
the disjointed fear-emphasis campaign of the no camp. Due to the momentum and
organization of the yes camp, the odds of yes are better than even-money (even though
betting organizations put it at 36%).
The bottom line is that a yes vote is a distinct possibility; one that markets are not fully
prepared for. This is because it would encourage separatist movements across Europe and
beyond. As these types of uncertainties and anti-globalization aspects mount, long-dated USD-
denominated Treasuries should be the marginal benefactor.
In addition, tomorrow is 9/11 and the last of the August refunding auctions. The other auctions
were purchased at decent levels after reasonable concessions, helping to place the securities in
stronger hands. It was also a good sign that German Bunds fully regained early losses today.
These are just a few reasons to own long Treasuries. Too many cross-currents and too much
yield pick-up and carry makes it too soon to focus on the 2015 Fed (just yet).
And the hypnotic splattered mist was slowly lifting - Bob Dylan
FOMC Speeches



Key Events
FOMC Sep 17
ECB Oct 2
BOJ Oct 7
BOE Oct 9
RBA Oct 6

www.gbm.scotiabank.com

TM
Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with "Global Banking and
Markets", is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova
Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital Inc.


Disclaimer

This publication has been prepared for Major U.S. Institutional Investors by Fixed Income Strategists of the Bank of Nova Scotia, New York
Agency. (BNS/NYA). BNS/NYA Fixed Income Strategists are employees of Scotiabanks Fixed Income Credit Sales & Trading Desk and
support the trading desk through the preparation of market commentary, including specific trading ideas, and other materials, both written and
verbal, which may or may not be made publicly available, and which may or may not be made publicly available at the same time it is made
available to the Fixed Income Credit Sales & Trading Desk. Fixed Income Strategists are not research analysts, and this report was not reviewed
by the Research Departments of Scotiabank. Fixed Income Strategist publications are not research reports and the views expressed by Fixed
Income Strategists in this and other reports may differ fromthe views expressed by other departments, including the Research Department, of
Scotiabank. The securities laws and regulations, and the policies of Scotiabank that are applicable to Research Analysts may not be applicable to
Fixed Income Strategists.

This publication is provided to you for informational purposes only. Prices shown in this publication are indicative and Scotiabank is not offering
to buy or sell, or soliciting offers to buy or sell any financial instrument. Scotiabank may engage in transactions in a manner inconsistent with the
views discussed herein. Scotiabank may have positions, or be in the process of acquiring or disposing of positions, referred to in this publication.
Other than the disclosures related to Scotiabank, the information contained in this publication has been obtained fromsources that Scotiabank
knows to be reliable, however we do not represent or warrant that such information is accurate and complete. The views expressed herein are the
views of the Fixed Income Strategists of Scotiabank and are subject to change, and Scotiabank has no obligation to update its opinions or
information in this publication. Scotiabank and any of its officers, directors and employees, including any persons involved in the preparation or
issuance of this document, may fromtime to time act as managers, co-managers or underwriters of a public offering or act as principals or agents,
deal in, own or act as market-makers or advisors, brokers or commercial and/or investment bankers in relation to the securities or related
derivatives which are the subject of this publication.

Neither Scotiabank nor any of its officers, directors, partners, or employees accepts any liability for any direct or consequential loss arising from
this publication or its contents. The securities discussed in this publication may not be suitable for all investors. Scotiabank recommends that
investors independently evaluate each issuer and security discussed in this publication, and consult with any advisors they deemnecessary prior
to making any investment.