The pound slid the most in 14 months and UK stocks and bonds dropped after a poll showed a majority of voters in favor of Scottish independence.
The British currency lost 1 per cent to $1.6165 by 8:18 a.m. in London, extending last week’s 1.6 per cent drop, while the FTSE 100 Index slipped 0.3 per cent and the yield on 10-year gilts increased two basis points. Standard and Poor’s 500 Index futures retreated 0.1 per cent, and the Stoxx Europe 600 Index lost 0.4 per cent. The MSCI Asia Pacific Index fluctuated.
The percentage of voters in favor of Scotland breaking from the United Kingdom rose to 51 per cent less than two weeks before the referendum, according to a YouGov Plc poll for the Sunday Times.
A “Yes” vote would raise the prospect of a more cautious approach from the Bank of England, which this month kept its key interest rate at a record-low after persistent weakness in inflation and wage growth reinforced the case for maintaining emergency stimulus.
“This ensures that even if Scotland votes ‘‘No’’ next week the issue will not go away,” said Sam Tuck, a senior currency strategist at ANZ Bank New Zealand Ltd. in Auckland. “The GBP was under pressure as markets consider there to be little credible planning for a ‘‘Yes vote’’ with a large number of unresolved questions expected to cause a halt in business investment and keep the BoE on the sidelines should Scotland vote ‘‘Yes’’.”
Following months of surveys that showed Scotland was unlikely to vote to leave the UK, the latest results have shocked the currency market into action. One-month implied volatility, a measure of future price swings used to determine cost of options, surged 23 percent, the most since 2008, after the previous poll was released on Sept. 2.
“The referendum is on a knife edge,” Nick Stamenkovic, an Edinburgh-based fixed-income strategist at broker RIA Capital Markets Ltd, said yesterday. “Markets have been too complacent but are now waking up to the increased risk of Scotland voting for independence.”
The question of whether a go-it-alone Scotland will be able to keep the pound in partnership with the remaining parts of the UK has dominated the independence debate with all the major parties in London saying they would oppose it. Scottish First Minister Alex Salmond has argued they would change their view once negotiations began in the event of a vote favoring independence and has said Scotland would refuse to pay its share of the UK national debt if they didn't give in.
A “Yes” vote for independence would prompt a significant increase in the volatility of UK assets, while the pound would fall against the euro and particularly the dollar, RIA’s Stamenkovic said in response to e-mailed questions.
Declines in the pound may also spark losses for "stocks with cross-border flows and trade," including Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc, according to Jeremy Stretch, the head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London.
“The risks are even higher” of a vote for independence after the latest polls, he said yesterday.
A win for Scottish nationalists may have "severe" consequences in the short term and spark a pound sell off, Goldman Sachs Group Inc. economist Kevin Daly said in a Bloomberg TV interview last week. BNP Paribas SA said a "Yes" vote would hurt UK government bonds as much as a credit-rating downgrade, while Standard Bank Plc's head of Group-of-10 strategy Steve Barrow said it could push the pound down toward the mid-$1.50s.
"Given the importance of the vote on September 18th, the narrowness of the gap between the two camps and a market that, to date, has largely assumed that a 'No' vote was by far the most likely outcome, the danger is that the next few days sees a rush by investors to hedge their risks," Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London, wrote in an e-mailed note. "It therefore looks as if it could prove another dangerous September" for the pound, he said.
Bloomberg
