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Sterling Volatility Spikes To 3-Year High As Scottish Independence Nears
The dramatic rise in support for Scottish independence is nowhere more evident than in GBPUSD implied volatility, which has soared to 3-year highs as The Guardian reports a further poll showing next week's referendum is on a knife-edge with a gap of just 1 percentage point between yes and no. As one 'Yes Scotland' representative noted, "This new Scotland could be less than a fortnight away. But we must not be complacent. The scaremongering, dissembling and misrepresentation of the no campaign will be ramped up as we approach polling day." Of course, Scotland is not the only EU nation seeking separation, as we illustrate below, and as Goldman Sachs notes, there could be a broader impact on the risk premium across Europe as Scottish independence leads to other calls for more regional autonomy.
GBPUSD volatility has exploded...
A dramatic surge in support for Scottish independence has been confirmed by a further poll that shows that next week's referendum is on a knife edge, with a gap of just one percentage point between yes and no.
The poll by TNS found that support for independence has jumped by six points in the last month, putting the yes vote at 38% and the no vote at 39%, wiping out a 12-point lead for the pro-UK campaign led by former chancellor Alistair Darling.
The switch in support will delight the yes campaign but deeply alarm their opponents, coming after a YouGov poll found the pro-independence vote had a narrow one-point lead for the first time.
But it's not just Scotland... (via Armstrong Economics)
Which, as Goldman notes, may have broader implications for risk premia across Europe...
The implications for both Scotland and the rest of the UK of Scottish independence, in terms of factors including growth, currency and how debt and assets are divided, are highly uncertain and, as such, deriving the implications for equities is conditioned by that high degree of uncertainty too. With this qualification in mind, we consider a number of potential short-medium-term impacts for the equity market should we see a ‘Yes’ vote on September 18:
For companies based in Scotland or those with large Scottish assets (such as the utilities) there would likely be, at least in the short term, higher uncertainty with respect to these assets; these represent only 2.7% of the FTSE 350;
Indirect impact on all UK equities from higher uncertainty; UK equities may prove especially sensitive to this, as the holders of UK shares have become increasingly international in recent years (50% held outside the UK);
A further fall in sterling; this ought to be good for UK stocks given the high foreign sales of listed stocks (c.80% for FTSE 100 names, c.50% for FTSE 250). We estimate the impact on FTSE 100 earnings would be around 4% for each 10% move in sterling; the pound has already fallen 5% versus the dollar since July and around 2.5% in trade weighted terms;
There is a chance of a short term negative shock to growth as a hit to consumer and business confidence delays or stalls investment and spending plans across the UK. To some extent, this ought to be countered by the easier financial conditions provided by the fall in sterling and, most likely, by a more dovish policy stance from the BoE than would otherwise be the case. The FTSE 250 would be more sensitive to a UK growth disappointment; FTSE 250 earnings are highly correlated to domestic growth and have a beta of over 5x to moves in GDP.
Finally, there could be a broader impact on the risk premium across Europe as Scottish independence leads to other calls for more regional autonomy. Separately, Scotland would have to negotiate with the European Union as to whether it would remain a member of the EU and this again could led to additional rifts within European as well as UK politics.
Companies with direct exposure
The table below shows the companies in the FTSE 350 with Scottish cities as headquarters. This list represents just under 3% of the FTSE 350 by market cap (we have excluded investment companies). The stocks have performed roughly in line with the market, year to date, but have underperformed by around 3% since June (see chart). Of course, this is not comprehensive; not all companies with large direct exposure to Scotland have their headquarters there. Our utilities team highlights the impact of Scottish independence in European Utilities: Uncertainty ahead of Scottish independence vote high for SSE, IBE, September 4, 2014. For these stocks, they face a potential tax on generation and funding risks for Scottish renewables. A new regulator in Scotland may also lead to a review and possible change to allowed returns.
A spike in uncertainty for UK equities
If Scotland votes 'yes', a prolonged period of negotiation would follow between Scotland and (the remainder of) the UK over the terms of the separation (prior to the separation being completed on March 24, 2016). The issues that would require negotiation include whether and under what terms the newly-independent Scotland would be able to retain Sterling as its currency, and how existing UK government debt would be split between Scotland and the remainder of the UK.
The uncertainty is likely to weigh on UK equities, not least because so many international investors now have significant stakes in the UK stock market (see chart). UK pension and insurance companies - traditionally the dominant investor in UK equities - continue to sell their quoted UK equity exposure at a pace of £5-10bn per quarter, a selling pace which has shown no signs of slowing (see second chart below). International investors have generally been net buyers, absorbing some of this selling, but, in our view, they are likely to be more sensitive to UK-specific uncertainty than domestic-based investors, who have greater need of sterling investments to match their liabilities.
A fall in sterling; A positive for the FTSE 100 and more internationally exposed names...
We've already seen a large downward move in sterling in recent weeks as the 'Yes' camp has gained momentum; versus the dollar, sterling is down over 5% since July. FTSE 100 stocks have on average only 22% of sales to the UK so they should benefit from anything that pushes down sterling even if it's at the expense of UK growth. In terms of earnings, a 10% fall in sterling in trade-weighted terms would we estimate have a roughly one-for-one impact on the sales of companies with exposure; so, for the FTSE 100, with roughly 80% non-UK sales, this would add about 8% to sales. However, based on analysis we've done Europe-wide for companies, we find only around half of currency moves get down to the bottom line given some is absorbed by shifts in margins. We estimate the impact on FTSE 100 earnings would be around 4% for each 10% move in sterling.
For the FTSE 250, around 50% of sales are non-domestic, so the impact on sales growth of a 10% move down in sterling would be to add 5% to sales, all other things equal, but only around 2-3% to profits.
...but growth implications would weigh on the FTSE 250
Ultimately, however, the move in sterling, especially for the FTSE 250, is likely to be more than offset by the economic impacts on confidence and uncertainty. The relationship between FTSE 100 earnings growth and UK GDP is not all that strong: the correlation has been 38% since 1994 with a beta of earnings growth to changes in GDP of slightly over 3x. This seems high but is probably a reflection of the close relationship between UK GDP and international growth, and it's the latter which is most likely driving FTSE 100 earnings (see chart below).
For the FTSE 250, the correlation between earnings growth and UK GDP has been higher, at over 50%, and the beta of earnings to GDP is over 5x; this is a reflection of the higher exposure to the UK and the more cyclical nature of the companies in the index with high weights in industrials and financial services (see second chart below).
The chart below shows the performance of UK domestic-exposed companies relative to international ones with the trade-weighted pound. In recent weeks, as the pound has fallen the domestic names have underperformed. However, the move has not been large and in late 2012 and early 2013 sterling fell sharply in trade-weighted terms but the domestic names performed well, as growth was picking up in the UK but weak elsewhere.
We continue to believe growth, as much as FX moves, will be critical driver of performance.
* * *
And just two weeks ago, no one had given it a thought (aside from us) and now...
"It is too close to call and both sides will now be energised to make the most of the last few days of the campaign and try and persuade the undecided voters of the merits of their respective campaigns."
"This new Scotland could be less than a fortnight away. But we must not be complacent. The scaremongering, dissembling and misrepresentation of the no campaign will be ramped up as we approach polling day."
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We should all panic. Panic always helps.
I have an odd feeling Scotland's not leaving the union. I don't know why, but I feel like the point's been made, they'll get a little extra leverage out of this domestically and that'll be good enough to take the wind out of of the sails and just miss on independence. Hope I'm wrong.
Meanwhile... McDonald's sales are imploding:
http://www.cnbc.com/id/101983649
Down 2% MOM just in the U.S. !
Alistair Darling is a turncoat ...
How this man without any desency has the courage to go in front of people and ask them to put his interest in front of theirs ... i suppose thats what he has done all his life, having it great at the expense of the Scottish people.
come to think of it that the definition of a typical politician but in his case the people got to be stupid not to see through him and where he is coming from...
The Scots got to get their independence and next step quit the pound, ask for their share of the gold and establish a new currency ... thats about it.
Meanwhile... McDonald's sales are imploding:
Are you really gonna pay $7.76 for a Big Mac?
It's just math really.
http://money.cnn.com/2014/07/24/investing/big-mac-price/index.html
Yeah, it is just math
Cause at these loss rates, McD's U.S. sales will be cut in half in only three years!
As 0.98 ^ 36 = 0.48
Haven't you seen enough proof yet that math doesn't matter anymore?
Maybe they need to introduce the Bigger Mac.
.
Sorry to say independence will not be gained. TPTB have too much to lose by it. Diebold machines or some other form of proven fraud will be utilized to nix this event. I hope I'm wrong, too.
Sterling Volatility Spikes To 3-Year High
Is anyone watching Soros?
On the other hand, a vote for Texas independence...
I think the dumb part is voting now for an event so far down the line. 2016? systemic unstability will wreck both the sterling and FTSE by then.
Several complex issues surround the idea of going off on their own. If Scotland wants independence then so be it, but sorting out the political and economic ties with the rest of the UK, may be difficult. Scotland has to be allowed to stand on its own two feet without the rest of the UK financially and economically supporting it. The Euro proves that more than one sovereign country cannot easily use the same currency.
Portugal, Ireland, Greece, Italy and Spain have discovered that you cannot have full independence and share a currency. Another problem is that if the UK Government is to agreeable to a separation, will Wales and Northern Ireland move towards independence? That might encourage similar movements in Catalonia, Belgium, Northern League in Italy, Basques, Cornish, and among the Poles. More on the issues surrounding the pound and an independent Scotland in the article below.
http://brucewilds.blogspot.com/2013/06/british-pound-and-independant-sco...
I have really GOT to start reading the ID names first so that I don't start reading wordy, lame blog advertisements posing as ZH forum posts.
I don't understand why the Tylers put up with this. Maybe Bruce and some like him pay the access fee without seeming to have a commercial relationship with ZH.
Kid sister?
2nd cousin?
Dunno.
Let the WIND blow HIGH. A big FUCK YOU to Cameron & Co.
Bite the hand that feeds you shit!
Don't believe the polls. WE'RE GOING.
Fuck the bozos!
I'm calling this now. 51% no 49% yes.
Because if the past few "close" elections in the eu habe shown, nothing to keep the population complacent than sliding to a 2% pt. Advantage for the status quo (aka the EU).
Don't believe me? Look at the last Italian and Greek elections.
HvR is somewhere out there smiling as a little voter fraud never hurt anyone. I only hope this election is administer on paper and the Swiss or maybe the Russians are the ones monitoring it.
No, you see that still leaves the UK screwed because half the Scottish population still want out. It needs to be a landslide in favour of the union for the establishment to win. Otherwise it'll just happen again in 10 years.
2nd richest City in England...and I imagine in Europe as a whole...is in Scotland.
Now that. Is a large part of the problem right there.
As a Scot who buggered off to substantially greener pastures in Germany, I'll just point out to my former countrymen that Scotland simply doesn't exist outside your imagination. England exists. For everybody outside of the UK; Europe, America, Asia, England IS the United Kingdom. At best Scotland is a national park somewhere in northern England with gnomes who wear skirts and play bagpipes.
Irvine Welsh hit the bullseye with this:
https://www.youtube.com/watch?v=wqgkZDbe4Xk
ok so back to the topic. Which city and by which criteria have you decided that the 2nd "richest" city in England is actually in Scotland? Cos by no criteria I've searched have any Scottish towns or cities in 2nd place.
Here's a list of European areas by GDP per capita. So show me the Scottish ones... Note, I DO see Dublin there.
http://en.wikipedia.org/wiki/List_of_metropolitan_areas_in_the_European_...
That's a lot of cracks showing in the facade.
Over the last year the UK economy may not have been as strong as we were lead to believe. I have been watching with wonder as the economic news flowing from the UK has been spun to give the impression of robust growth. How do you explain the pick up in growth to a mature country that has been struggling under debt? In general the UK economy is not particularly competitive, over-weighted in the service sector and global finance it is vulnerable to problems that surface throughout the world.
As usual we must look deeper into the facts to get a clear picture of what is really happening. It now appears much of the recent strength comes from the fact that thousands of Britons are receiving compensation for Payment Protection Insurance (PPI). Most Americans reading about the pickup in Britain's economy never even heard of the PPI. The total paid out so far, £13.3bn or about 22 billion American dollars has been a huge economic boost. More in the article below.
http://brucewilds.blogspot.com/2014/02/uk-economy-flood-of-questions.htm...
I should imagine the Queen has firmly told Cameron to get grip on the situation and make sure the vote goes England's way.
Basically there can be no close call here or they will lose it, The Scots will have to turn out in a big way and bang this vote clear out of park if they want their independence.
I'd argue the exact opposite. Plus no talk of "Siberian separatists" either. Let alone mainland China.
Not all of Japan is Tokyo either...
"I should imagine the Queen has firmly told... "
or else what??
No Xmas card this year?
No invitation to the Spring Cotillion?
Other than a little bruised pride, what does she care? She still gets to own enormous, beautiful estates there, earning rents, growing crops, vacationing.
Big deal.
"US corporate profits surely will benefit from a weaker $$ as much of their profits comes from overseas."
unless they are planning to go full on "iceland" the scots would have to be retarded to walk away from the uk and the pound. greatest. scam. ever.
You are right. It is. But only for club members sitting in the square mile of The City of London.
The rest of the UK (including most of England north of Watford) gets well and truly fucked by it.
Hmmm... where does that sound familiar...
I'm betting that there are at least one or two states in the US which would vote in favor of secession right now ....
Free Cascadia.
You are watching the final death spasms of The British Empire.
It wasnt a bad run you have to admit, as far as empires go.
No no no. It's still alive and well. It's just headquartered in New York now. Has been for some time.
I dont understand why they want to be independant. Havent they heard, no borders, international law, UN governance, NATO protection, is the model for the NWO?
This independance silliness will be quashed. I have no doubt.
"The scaremongering, dissembling and misrepresentation of the no campaign will be ramped up" Such a balanced article.....not. Poor show zerohedge.
As for poster Arius's comment: "The Scots got to get their independence and next step quit the pound, ask for their share of the gold and establish a new currency".
Salmond will unsurprisingly grab the juvenile & plain thick ('let's get rid of the English') vote. 'Arius' isn't capable of grasping that Scots & zionists have been ruling the UK for decades.... & the nationality of the gold seller Arius?? ... clue: he isn't 'English'.
If only (& correctly) all of the UK had the vote on this issue, the result would be a resounding 'Yes'; but of course that sends the 'wrong' ("fuck-off Scotland, we are fed up paying for you") message from 'the English'.
Slimey Salmond is a smart operator, but he has not got Scotland's interests at heart. I wish he had. Maybe I would come home.
Guys, guys, guys. Get a fucking grip.
Voting is only allowed to the extent that it makes people feel that they are involved and that their votes lend credibility to the State. That's it.
There will be no event that is off-script. There is no "volatility" when the outcome is rigged.
It's all ball bearings! Maybe you need a refresher course!
This article is misleading. 75% of the U.K. economy is service based. Whether or not 50% of stocks are held externally a softer pound will have a dramatic effect on purchasing power in a "service based" economy.