Financial markets relieved by Scottish ‘No’ vote

Today’s ‘No’ vote to Scottish independence comes as a relief to investors and financial markets, reflected by an early morning sterling bounce to a peak of 1.65 against the US dollar.

The results of yesterday’s (18 September) referendum on independence revealed Scotland has voted not to leave the United Kingdom, following months of intense campaigning, great uncertainty and volatility in markets.

With a projected turnout of 84.5 per cent, the projected results of 55.4 per cent for ‘No’ against 44.6 per cent for ‘Yes’ was a larger gap than signalled by voting intention polls, Azad Zangana, Schroders’ European economist, said.

He said the news will come as a “relief” for investors and financial markets, and this has been reflected by an early morning bounce in sterling versus the euro and the US dollar.

Mr Zangana said: “Indeed, sterling has risen from 1.62 against the US dollar at the start of the week to a peak of 1.65 this morning.

“The prospects of months of messy negotiations, uncertainty over the division of national assets and debt, and the currency arrangements of an independent Scotland had been weighing on the confidence of investors over the past few weeks, especially as polls had tightened.”

Think-tank Capital Economics agreed that UK markets have greeted Scotland’s decision with “some relief”,

Samuel Tombs, senior UK economist at Capital Economics, said: “Even so, a substantial rally in asset prices seems unlikely, since the markets only ever priced in a small chance of a Scottish ‘Yes’ vote.

“Although sterling fell against the dollar in the weeks before the vote, this seems to have largely reflected upward revisions to expectations for US interest rates, rather than concerns the UK might fall apart. So sterling seems unlikely to return to the $1.70 mark seen two months ago.”

Alan Wilde, head of fixed income for global at Baring Asset Management, added that there will be a “collective” sigh of relief” as a period of huge uncertainty has been avoided. As a consequence, he expects markets to calm.

“Sterling has taken the bulk of pressure and a recovery to $1.65 or so seems plausible though upside potential may be limited as sterling has actually been stronger than other major currencies such as the euro and yen as the US dollar has rallied hard.

“For gilts, which have outperformed US Treasury bonds, there could counter-intuitively be some downside with the referendum out of the way: one consequence of a ‘Yes’ vote was that Bank of England governor Carney was expected to go slowly tightening UK rates.

“This outcome may now lead markets to focus back on growth and conclude that the UK economy needs some modest restraint and that the BoE will be ahead of the US Federal Open Market Committee raising official rates.”

Chris Williams, chief executive of online investment advice service Wealth Horizon, said: “Today we hope to see things return very much back to normal.

“We have already seen sterling rally strongly in the currency market and expect that the FTSE will see similar movements throughout the day as domestic and global investors alike, reaffirm their faith in the buoyant UK economy.”