The week, which could lead to the final collapse of the 314-year alliance between England and Scotland, will focus the city’s trading tables on the upcoming market disasters.
As Scots vote on 6 May on whether to hold a second independence referendum, fund managers and sales strategists see the possibility of massive chaos in the UK economic environment. An echo of the early days of the Brexit poll, with few hedging for a disruptive outlook, while the derivatives market shows no signs of impending stress.
While the stakes could hardly be higher, it is not clear that the UK government will agree to another referendum, even if pro-independence parties win a majority on Thursday. But as the vote reawakens troubling memories of the UK’s secession from the European Union, fund managers are dusting old rulebooks on how to trade binary risk event when everything is time dependent.
“You’re going to have tremendous uncertainty, financial chaos and recession,” as well as a 10% devaluation of the pound, said Mark Nash, wealth manager at Jupiter Investment Management.
Nash is not yet hedging such a scenario as is the market. The average value of the forecasts made in the Bloomberg survey until June is $ 1.39 per pound.
However, a handful of investment analysts have opted for bearish forecasts.
- Strategists at Credit Agricole SA recommend selling the pound short against the dollar, among the reasons – the political risk over the independence of Scotland.
- Barclays Plc dropped its call to go long on the pound against the euro due to potential pre-election volatility.
- Credit strategists at UBS Group AG lowered their outlook for a select group of UK bank bonds to neutral from an edge, warning that a “long UK credit deal” could be thwarted by the risk of a referendum.
One thing is for sure: if the situation escalates, money managers will have to act quickly. Chances indicate that a repeat of the 2014 referendum, which Scotland voted to retain, would be too close to be called.
The consequences of secession will be enormous. Negotiations will be required about what currency an independent Scotland will use, whether it will take some of the UK’s public debt and what trade agreements it will have with the rest of the UK. The Scottish National Party also harbors ambitions to bring Scotland to the EU, a situation that would create huge border and trade tensions if the problem ring fence Northern Ireland in Brexit – any example.
“I’m wondering if the markets really took into account the full implications of these choices,” said Julian Howard, director of multi-asset decisions at GAM Investments, whose portfolios are strategically set to depreciate the pound sterling. “That would be much worse than Brexit, as Scotland is much more closely tied to the UK than the UK is to Europe. We’ve been talking since the 1700s, not the 1970s. “
The location of financial institutions can also be contested. If they remained based in Edinburgh, Scottish banks would lose support for the Bank of England’s quantitative easing program and become less creditworthy, according to Charlie Parker, managing director of boutique investment manager at Albemarle Street Partners.
It’s kind of a risky event that makes a career for those with the foresight to get it right.
At Nomura Holdings Inc. strategist Jordan Rochester was part of the team that developed the lucrative business. a model that will help the bank to announce the results of the 2014 referendum ahead of schedule. His political analysis of secession from the EU has led to him being nicknamed Mister Brexit. Now he says the pound might fall up to 6% if Scotland voted to exit, depending on what the price was prior to the outcome.
But even he is not worried about Thursday’s election and says the pound may even be on the rise if SNP fails to win more than half of the seats, some polls suggest. However, the reason for independence could prevail after the Greens vote count, and the actual date of the referendum could cause serious hedging.
To read: Why the Scottish road to independence vote is thorny: QuickTake
“The market will look at the vote in the new referendum and treat it much more like a tougher vote than it did in 2014, when it was just last minute fears, not months before,” Rochester said.
Westminster is likely to rise resistance any plans to push for an independence vote by refusing to grant the Scottish Parliament permission to make it legally impenetrable. This leaves the possibility of a long-term constitutional swamps over whether the Scottish Parliament can call a legitimate referendum on its own.
While the prospect of an intensified Scottish breakaway movement scares traders, the derivatives markets remain calm. Options indicate the cost of insuring pound fluctuations well below recent lows. The five-year change in risk in the cable trade is close to the average since Bloomberg began collecting data in 2005.
“The challenge in assessing the impact of these events on the markets is that even if we know they are on the horizon, we don’t know when the markets will react and whether the status quo will ultimately continue,” said Shina Shah, a foreign exchange specialist. politics. Morgan Stanley strategist. Her firm estimates there will be a 30% chance of a referendum by the end of 2024. “There are so many unknown and further obstacles.”
– With the help of Sam Unstead, Thassos Vossos, Joe Easton and Sid Verma.