Sweating Scotland

Way back in April,  when Macro Man mused about the then-distant Scottish independence referendum, he suggested that sterling should eventually be priced with a risk premium in the run-up to the vote.

At the time, of course, it seemed like the issue was largely a talking point for FX salesfolk to drum up business, given that market focus was squarely upon other issues such as Carney, the Fed, Europe, etc etc.  To be sure, sterling has fallen quite sharply against the dollar, though given the relative stability in EUR/GBP much of that was a dollar issue rather than a sterling one.



Today, however, there can be no doubt that markets have noticed the Scottish issue, as weekend polls put the independence supporters in the lead, with now a scant ten days to go before the vote.  A quick glance at 1 month cable vols suggests that the market was not prepared for this at all:


 (chart courtesy of BAML)


From Macro Man's perch, this is the panic that you are probably supposed to start fading, if only in dribs and drabs.   Short sterling has rallied back to levels not seen in nearly a year, and the vol chart above tells you that people have panicked a wee bit.

Perhaps you don't want to do your full ticket now, but providing a bit of liquidity in times of uncertainty can often reap handsome rewards.

There are so many issues still to be resolved, even if the Yes vote goes through, that it's difficult to trade on anything but emotion, such is the dearth of facts on such key issues as:

* What currency will Scotland use?  They seem to think sterling, the government seems to think not.   (Hint: if you have any Scottish fivers, best spend them this week while they're still legal tender.)

* Will Scotland be admitted to the EU?   Not if they use sterling, according to Olli Rehn.

* What portion of UK debt will Scotland assume?   None, if they don;t use sterling, according to Alex Salmond.

*  Will Scotland keep the queen as head of state, or dredge up some descendent of Bonny Prince Charlie to assume the throne?   Or will it become a republic?

* If Scotland votes Yes, what does this mean for the UK general election next May?   Will Scottish precincts vote/count?  What then happens when Scotland leaves the UK?  Do those MPs get ejected from Westminster, possibly bringing down a government?   Anything that keeps Mr. Bean Ed Milliband away from Downing Street will likely be taken positively be markets.

In the meantime, markets can merely watch the polls and sweat on the Jocks' decision.   Decisions taken in panic, however, are unlikely to be rewarded in the fullness of time.

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abee crombie
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September 8, 2014 at 1:46 PM ×

If panic starts to set in on UK asset markets, FTSE would probably be the best buy IMO, though so far it hasnt done much.

While some may look to the Canadian/Quebecois issue to draw parallels, it seems, from my limited knowledge of the area, that Scotland is much smaller relative to overall GDP at something like 10% vs 20% for the Frenchies.

I like buying panic, but I just wonder how many ppl (outside UK specifically, like me) are just waking up to the issue

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Polemic
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September 8, 2014 at 3:35 PM ×

The whole Scottish thing is woad based nuts.

The whole world is screwed up by centuries old gripes. There should be a global amnesty on all history and we start again with a clean sheet

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Anonymous
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September 8, 2014 at 4:22 PM ×

Angus says

There's a hint of complacency in this mornings research notes. Seems most of the big houses assume everything will be resolved quickly viz a currency union and asset distribution ( oil ). Problem with this resolving itself quickly is that the rUK government won't be in a position to agree on terms until after the May 2015 election. It makes more sense for London to wait until after the 2016 Scottish elections to hope that the SNP loses its majority in the Holyrood parliament. Gilts may not be happy to wait that long. In the interim of course it's more than likely that the SNP will sweep the board in the 2015 UK elections north of the border giving Labour a bloody nose. This situation is a gift that's going to keep on giving. Any idea how a rUK currency without oil and a trade deficit of 6.9% would trade ?

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Anonymous
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September 8, 2014 at 4:29 PM ×

C says
Angus,
"Any idea how a rUK currency without oil and a trade deficit of 6.9% would trade ?". Adding in the reduction in welfare payments North of the border probably better in the long run.
In trying to rebalance this economy from one which has been using the public sector/welfare for decades to offset globalisation I would think Scotland leaving should be viewed as a good start bettered only if we could persuade Wales and Nth Ireland to follow. All comes down to lowering the transfer costs we currently bear.

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Anonymous
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September 8, 2014 at 4:46 PM ×

by nature i do like to fade panic but i don think moves done yet-yes vol has popped the abso level is nothing-9 vol after a 10 big fig move is still very cheap.
even a no vote makes things uncertain for a while -would wait before fading short sterling - and generally that contract has a bad habit of overshooting
(if anything yes vote might hit europe on catalunia fears?)

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E Longshanks
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September 8, 2014 at 4:48 PM ×

So where exactly is this scotland place everyone is talking about? Is it somewhere north of Watford? And why do the aborigines there want independence? Don't they like their nature reserve, after all they get free battered mars bars...

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Anonymous
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September 8, 2014 at 4:54 PM ×

Angus says

Thanks C. I'd like to agree but am stuck with the fact that welfare spending in Scotland was 3238 quid a head compared with 3176 in rUK - a 2% or thereabouts difference. Total Barnett Formula transfers are in the region of 6 billion and would end soon anyway. Saw a comment by someone in a morning note that without North Sea oil and gas assets the current account deficit ( welfare transfers adjusted ) would hike to 6.9% from last years 4.4%. Haven't seen anything to indicate how a change of this order would reflect in interest/ exchange rates and how quickly. Just asking .

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Anonymous
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September 8, 2014 at 5:17 PM ×

Agree with Anon 4.46.

Regardless of yes/no this brings more heat to Catalan story... In further great timing it is Catalan National Day on Thursday, which should see some nice protesting and maybe even a photo for FT front page on Friday.

SPGB trading well inside BTPS, seems an easy mean revesion to play? If the scots story gets wiped off the table, unlikely to lose a lot... likewise if they go, Spanish bonds will open v wide next day... It is a much more serious part of their economy than Scotland is to the UK. Cheers macro man as ever.

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Anonymous
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September 8, 2014 at 6:00 PM ×

C Says
Angus,
In truth by way of opinion I don't have a dog in this 'fight'. I'd expect both parties to do fine IF they treat a period of adaptation with some reasonable policies. However, in the shorter term one sees plenty of potential for chaos.
Indeed ,if I had a position I'd like it to be chairing one of the very may quangos which would spring to life post referendum.

As to those numbers I did mention two other wee parts that should be nameless and I'd expect the three brought together to be above that national average. Historically, parties have tended to load the purse for their strongholds and guess what the further you get from London the less loved the Conservatives have been and the more loaded have been the transfers to Labour heartlands.
Having said which you buy a postcode in Burnley for the cost of decent shack in London. So, perhaps the transfers were more a sop than an outright reward.

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Leftback
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September 8, 2014 at 6:06 PM ×

The sweaties are dying to make a run for it with the oil revenues and watch Westminster piss its pants. England is screwed forever if this happens as the Welsh will follow suit and then the Tories will rule in perpetuity, free to pillage and extract what little value remains within perfidious Albion.

Don't be surprised to see Treasuries bought at the expense of gilts.

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William Wallace
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September 8, 2014 at 6:07 PM ×

"FREEDOM!"

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Leftback
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September 8, 2014 at 7:18 PM ×

Attention, MM!! We have correlation breakdown today, for months USDJPY and SPX have been trading in lock step, and today that's all gone for a Burton. Likewise for a while EUR weakness has been good, and today it is suddenly bad for equities. FX regime change?

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Nico G
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September 8, 2014 at 11:33 PM ×

in those dire times it is tempting for the wealthy to split from the [lagging/poor/lazy etc]

seeing Scotland, Cataluna, and even Flemish people intention at a regional level one is left to wonder how can a disparate lot like Europe still be in place today

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Anonymous
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September 9, 2014 at 3:46 AM ×

Sterling is selling off on the back of this latest poll indicating a possible victory for the 'Yes' camp, but how much weight should we really place on one poll? I'm sure all patriotic Scots out there will be saying 'yes' to the opinion polls, but will they really pull the trigger on the day...? There are still plenty of undecided voters (enough to swing this), and voting 'yes' means voting for extreme uncertainty. Besides, this latest poll (and the panic move in Cable) should give a boost to the 'Better Together' campaign, ensuring a higher turnout for the 'No' votes. Anyone want to start fading this move in the run-up to the vote over the next ten days?

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Anonymous
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September 9, 2014 at 7:15 AM ×

C Says
Anon 3.46,
I suspect it is complacent views like that which have helped to put the Yes group where they are today. Contrary to that view the group of 'don't knows' to be fought for will have diminished significantly by now and indeed expect a goodly portion of that to end up being non voters . Taking that poll at face value what we know from that rather than our opinion on what might or might not be is that the Yes group have the momentum and have picked up the 'don't know' vote so far. With so few remaining they ony need to pick up a few more and the NO group will have no way back. I'd agree with the view that this is too close to call.
Having said that it appears to have escaped the kneejerk camp that this is an advisory referendum only and even in the event of a Yes vote the event of a seccession would still be a couple of years distant. In other words the market has or is trying to anticipate a couple of years in a couple of days.To make this stick they'll need a steady stream of 'news' noise to fee it. I'd be reluctant to be in that looking for a continuance ,because I suspect it's more likely to be a consolidation action while the market digests the news it has already been fed at least for currency.

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Anonymous
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September 9, 2014 at 7:56 AM ×

C Says
From an equity point of view I note the Referendum 18th ,AliBaba 19th (?) and Sep Options all packed into the same period. Meanwhile one wonders how the market is going to absorb such a huge chunk of Alib other than by selling related stock in the main which would make any Apple surge from the Tech sector highly saleable I would have thought just to free up the cash.

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Nico G
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September 9, 2014 at 12:56 PM ×


Anon 3.46 etc

why is Apostle Anon so often quoted in this financial blog?

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Anonymous
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September 9, 2014 at 2:05 PM ×

We are all Japanese...following the script

Japan ten year yield between 1987-2004 /
German ten year yield from 2004

http://imgur.com/UdlsNv4

ἀπόστολος

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