Scottish independence at what cost

I have to say that back in May, when many analysts were highlighting this as an event risk, I really dismissed the idea of Scotland leaving the union as scaremongering or wishful volatility thinking. Although the polls have this event as simply just too close to call, I really think heads will rule over hearts as the economic evidence is simply too compounding, meaning that business would have no option but to move south. It was the YouGov poll last weekend that sent the pound into a 130 point gap opening after it showed the Yes campaign ahead with 53% of votes .With a further four polls released over the weekend showing no clear majority, it really has the market’s full attention. The Queen unusually commented outside Balmoral following Sunday service, saying: “I hope people will think very carefully about the future.” I will remind readers, though, that the bookmakers still have the result as 72% no – 28% yes; and as my late grandfather used to say after another bad day at the track, “You’ll never meet a poor bookmaker”.

This is the opening paragraph from David-Folkerts-Landau, who holds the title of Group Chief Economist at Deutsche Bank. It was sitting in my inbox as I awoke Saturday morning and I have to say it’s probably the sternest opening paragraph I have ever read, with some defining comparisons:

“Everyone has the right to self-determination and to exercise his or her democratic rights. But there are times when fundamental political decisions have negative consequences far beyond what voters and politicians could have imagined. We feel that we are the threshold of one such moment. A ‘yes’ vote for Scottish independence on Thursday would go down in history as a political and economic mistake as large as Winston Churchill’s decision in 1925 to return the pound to the Gold Standard or the failure of the Federal Reserve to provide sufficient liquidity to the US banking system, which we now know brought on the Great Depression in the US. These decisions, well-intentioned as they were, contributed to years of depression and suffering and could have been avoided had alternative decisions been taken.”

The recent polls now suggest that the Scots are now fully aware that a vote for independence will come at an enormous cost to the economy. Many business leaders are now suggesting they will have no option but to move south, as this referendum has all the hallmarks of the Quebec independence vote in 1995, where a 50/50 split remained until 69% of the votes had been counted.

A ‘yes’ vote will certainly change the outlook for BoE rates, where the market currently has 100 basis points of hikes priced in for 2015. The likely scenario being they would need to remain on hold whilst Scotland creates a free floating exchange rate, with the Bank probably having to be the lender of last resort until Scotland has its own financial infrastructure, which won’t be until at least spring 2016.

The results are expected to start coming in from 1am on Friday morning. Mary Pitcaithly, the chief counting officer, will announce the result once it has become impossible for the other side to win, with unofficial estimates putting this between 6.30am-7.30am on Friday morning.

Sterling is in for a volatile week with the release of CPI on Tuesday, employment on Wednesday and retail sales on Thursday. But under no uncertain reference, the referendum is due to cause some highly volatile periods for the proud pound as districts will be reporting results throughout the night on Thursday into Friday morning. Let’s remember this will not be an opening market event so the gaps should not be so severe as weekend announcements. In the event of a ‘yes’ conclusion, I would expect cable to be testing 1.5850 into the market close on Friday, as developments over coming months could drag the pound sub 1.50 if the US data continues to impress.  A ‘no’ outcome would bring a relief rally to 1.65 initially, as the market will turn its attention back to the UK data and the 2015 spring rate hikes from the BoE.