Scotland: the head wins!

19th September 2014

Ian Copelin, Investment Director comments “Scotland’s Independence Referendum was in the end decided by the head rather than the heart, with a decisive ‘No’ result.

Despite all the passion of the separatists and the closeness of the recent opinion polls, the UK market never priced in a ‘Yes’ victory, assuming that the argument over currency, debt and economic stability would win over.

Although the UK market expected the union to stay intact, markets have rallied in relief this morning as the uncertainty has been removed:  the FTSE-100 is currently up 50 points or 0.73% at 6,869, while the recent capital flight from the pound and gilts has reversed (Sterling has risen another 0.3% against the US dollar this morning to $1.6444 after jumping 0.7% yesterday).  With regard to our fixed interest exposure, our Income Analyst, Ciaren McShane, stated “as expected, the Scottish Referendum has resulted in a ‘No’ vote.  A ‘Yes’ vote wasn’t really priced into the fixed interest markets; therefore we have not seen too much movement in bond prices this morning.  A ‘Yes’ vote in the referendum would have created short term uncertainty in Sterling Fixed Income markets, if key credit metrics were negatively affected by the split, credit rating downgrades would have been a possibility.  As things stand, the ability of the UK to service its debt remains high”.

The UK market can now get back to business as usual (i.e. concentrating on the usual drivers:  predominately, the major Central Banks!).  Our Treasury Analyst, Terry McGivern, noted “Scotland, in voting ‘No’ to independence, has removed a large tail risk from the UK economic outlook and this could have some bearing on the scheduled path for a first rate rise by the Bank of England (BoE). The Governor of the BoE, Mark Carney, hinted at a Spring rate rise in his speech at the TUC conference on 9th September, with the market in agreement on this timeline, pricing in a 0.25% hike at the May 2015 meeting of the BoE’s Monetary Policy Committee (MPC) on the eve of the referendum.  With the headwind of a split in the union removed, uncertainty around the economy will be eased and this will focus the markets attention on whether economic data agrees with the BoE’s guidance or forces the BoE to act sooner than Spring 2015”.