Bloomberg

The Scottish question hangs over the UK’s assets from the pound to the banks

(Bloomberg) – A week that could start the possible collapse of the 314-year union between England and Scotland focuses the city’s trading hubs on impending market disasters. When the Scots vote on May 6th on whether there should be a second independence referendum, fund managers and sell-side strategists see the potential for massive chaos in the UK economic landscape in the coming years. Based on the early days of the Brexit survey, however, few secure a disruptive perspective, while the derivatives market shows no signs of oncoming stress. Although the stakes could hardly be higher, it is not clear whether the British government will vote for another referendum, even if the independence parties win a majority on Thursday. But with the vote bringing back unpleasant memories of Britain’s split from the European Union, fund managers are dusting old game books to trade a binary risk event where timing is everything. “You would have massive uncertainty, financial chaos and recession.” A 10% depreciation in the pound, said Mark Nash, a money manager at Jupiter Investment Management. Nash is not yet hedging such a scenario – and neither is the market. The median of the forecasts in a Bloomberg poll puts the pound at $ 1.39 by June. Still, a handful of investment analysts have made bearish calls. Credit Agricole SA strategists recommend selling the pound against the dollar with political risk to Scotland’s independence The Reasons. Barclays Plc issued a call to sell the pound against the euro because of the potential for volatility ahead of the elections. UBS Group AG credit strategists lowered their outlook on a select group of UK bank bonds to neutral because they were overweight The “long UK loan trade” could impact referendum risk. One thing is certain: when things escalate, money managers need to act quickly. Chances are a replay of the 2014 referendum, in which Scotland voted to stay, would be too close to call him. I have a feeling this is very likely to happen with the Scottish independence issue, ”said Jane Foley, head of currency strategy at Rabobank. “What I am telling our clients is to know that while this is not affecting the pound right now, it would be foolhardy to ignore it because it could suddenly make it onto the market’s agenda.” The consequences of secession would be enormous. Negotiations would be required as to what currency an independent Scotland would use, whether it would take a share of the UK’s national debt and what trade arrangements it would make with the rest of the UK. The Scottish National Party also has ambitions to include Scotland in the US EU, a situation that would create enormous border and trade tensions if the problem of fencing off Northern Ireland at Brexit were an example: “I wonder if the markets are actually the ones fully aware of the implications of this choice, “said Julian Howard, director of multi-asset solutions at GAM Investments, whose portfolios are strategically positioned for a fall in sterling. “It would be a lot worse than Brexit as Scotland is much more closely linked to the UK than the UK is to Europe. We have been speaking since the 18th century rather than the 1970s. “Mr. Brexit: The seat of financial institutions could also be challenged. If they kept their Edinburgh headquarters, Scottish banks would miss the support of the Bank of England’s quantitative easing program and become less creditworthy, according to Charlie Parker, executive director of boutique investment manager Albemarle Street Partners at Nomura Holdings Inc., strategist Jordan Rochester was part of it of a team that developed a greedy model to help the bank announce the 2014 referendum result early on. His political analysis of the separation from the EU then led to him being nicknamed Mr. Brexit. Now he says the pound could fall as much as 6% if Scotland voted to leave, depending on what the pre-outcome price was. But even he isn’t worried about Thursday’s election itself, saying the pound could even be in profit margin if the SNP doesn’t win more than half the seats, as some polls suggest. Still, once the Greens’ votes are counted, the cause of independence could prevail, and an actual referendum date could trigger strong hedging. Read: Why Scotland’s Road to Independence Is Atmospheric: QuickTake “The market is going to be looking at polls in a new referendum and treating it a lot more like a closer vote than it was in 2014 – when it was last minute scares, not months in advance “Said Rochester. The Prime Minister would likely oppose plans to seek an independence vote and deny the Scottish Parliament permission to legally watertight. This leaves the potential for a protracted constitutional dispute over whether the Scottish Parliament itself can call a legitimate referendum. While the prospect of a brisk Scottish demolition move frightening for traders, the derivatives markets remain calm. Options indicate the cost of insuring against fluctuations in the pound well below its recent lows. Five-year cable retail risk reversals near their average since Bloomberg began collecting data in 2005. “The difficulty in assessing the impact of these events on the markets is that even when we know they are on the horizon, we don’t know when the markets are going to react and when the status quo will ultimately prevail “Said Sheena Shah, currency strategist at Morgan Stanley. Your company sees a 30% chance of a referendum by the end of 2024. “There are so many unknowns and follow-up hurdles.” (Adds Rabobank comment in paragraph eight.) For more articles like this, please visit us on Bloomberg. comSubscribe now to stay up to date with the most trusted business news source. © 2021 Bloomberg LP