Investors are voting with their trades as they show their relief at the no vote winning in Scotland’s independence referendum. UK’s benchmark stock index the FTSE 100 is heading higher and not far off its all-time record high and sterling is getting a boost having been even higher in the overnight session.
The markets had been steadily pricing in a no vote throughout the week and more so on Thursday’s polling day as investors were buying sterling. For many short term traders a tidy profit has been made with some taking their profits in the early hours of Friday as GBPUSD pulled back from the 1.6500 level and EURGBP bounced from 0.7810 (1.2805 for GBPEUR equivalent).
But beyond any short term profits that people may have made in the currency or equity markets throughout this week, the longer term prospects for the UK should now be better, especially as all the uncertainty surrounding the referendum is gone. A yes vote will have had considerable ramifications for the UK economy, especially Scotland’s economy which is not currently in a position to go it alone and they would have needed considerable resource and assistance from the remainder of the UK in order to transition to full independence.
In the end it’s the economic argument that seems to have won through. Imagine having lent some money to someone in Scotland ahead of the election and the yes vote had won. Whether it be for a business plan, to buy a house or simply a few hundred pounds temporarily to help pay off a credit card bill, you would be wanting your money back fast as the risk of it devaluing would have been very high. Whether a pegged currency or a totally new one for Scotland, which were the only options being presented by the three unionist parties in Westminster (i.e. they could not keep the pound), it would have been worth a great deal less than before the election. You would also be very reluctant to lend any more money after a yes vote if it was asked for. Now put that in the context of a bank. People looking for a new mortgage would have suffered from higher borrowing costs, that’s if they could get access to the mortgage market in the first place which would have been in turmoil. Credit card rates would also have risen and businesses would have struggled to raise funds. Ultimately, the economic argument simply didn’t stack up and Scottish voters rightly rejected independence.
At least the issue has been put to bed for now and negotiations over devolved powers can commence, which is why this is a win win situation for Scotland. More powers will be given to Scotland, which is one closer step to independence anyway, but more importantly the outcome of these negotiations are unlikely to affect the current moves seen in sterling and the FTSE and we could see a continuation of the bounce in both. Equity investors in particular will have all eyes on the FTSE 100’s all-time closing high at 6930.2, however for sterling any further strength may be limited against the dollar as the trend that had established itself before the run up to the election, re-establishes it.
If another vote on independence does happen in future more thought will need to be given by any Yes Campaign as to exactly how to make the transition, especially when it comes to the currency argument as this would help negate any of the concerns raised above. As Alex Salmond said yesterday it was “a once in a lifetime opportunity for Scotland” so nationalists will have to wait for another lifetime, because at this point in time Scotland simply isn’t ready.
All said and done the thing I am most grateful for is that I do not have to eat my tartan trews!