If reports in the Financial Times are to be believed then the market reaction to the prospects of a Scottish independence vote have taken another drastic turn. Investor outflows are a characteristic of market uncertainty; investor uncertainty has seen pension funds and high net worth individuals withdraw funds from Scottish institutions.
We have no figures on just how much has left these Scottish portfolios but this certainly acts as a harbinger for the kind of moves we would see were the decision to split up the union taken. More alarmist members of our industry may say that this heightens the chances of bank runs at Scottish institutions but that is simply not true. Accounts of RBS and HBOS in Aberdeen and Fife will remain fully protected by the Bank of England as much as a Barclays or HSBC branch in Alton or Farnborough.
The message is clear however. Investors are not comfortable with the uncertainty that an independent Scotland represents, at least in the short-term. In the longer term, investors will demand higher yields and likely invest for shorter periods of time, increasing volatility. There are still many questions to be answered and, we have to remember, not a single vote has been cast yet but it does seem that investors are voting with their feet.
While the Queen has rightly kept her opinions on Scottish independence to herself, Bank of England Governor Mark Carney once again cast serious doubt over the plans of a newly independent Scotland keeping the pound. The route of his, and most economists’, opposition to Scotland keeping the pound lies in something called “The Impossible Trinity”.
Simply put, it states that a nation can choose two of the following policies but that all three in concert are impossible. Independent monetary policy, a free flow of capital across borders and a fixed exchange rate are the three sides of this policy triangle. If the Yes campaign wishes to take on the pound as its currency then it must submit to monetary policy from Westminster – a Eurozone-esque nightmare – or put in place capital controls in order to control the flow of capital across its borders.
I grant that that is a little heavy for a morning update but it is this basis of Carney’s comments that a currency union is “incompatible” with an independent Scotland.
A Carney speech before the Q&A generated a bit of sterling strength after he told an audience that seeing the Bank raise rates by the spring of 2015 was “consistent” with the Bank’s inflation goal. In a wider speech about wages he told a union congress that real wage growth is expected to resume in mid-2015. Carney’s speech has to be based on a No vote on Thursday. Anything else would be pure guesswork.
OIS swaps are currently viewing the probability of a rate hike by the Bank of England by Christmas at 12.6%. This was 24% a week ago and 36.7% a month ago with the same market only pricing in a 45% chance of a rate rise by March 2015. We would expect that probability to rise, alongside the pound, should we see a No vote next Thursday.
Carney speaks once again this morning, this time in front of the Treasury Select Committee. Ostensibly this will allow him a chance to re-emphasise his speech on wages that he gave yesterday to the TUC but we would be surprised if the focus did not take a slightly more Scottish turn.
European governments are meeting today to consider whether, despite the recent ceasefire, it is appropriate to increase the sanction pressure on the Russian government. Euro has come higher against the USD overnight as traders have just shaded bets on the greenback’s recent run on fears that the strength may be overdone.
Commodity currencies were broadly weaker yesterday as US yields supported the US dollar and commodity prices fell on the session. USDCAD broke above 1.10 for the first time since April while AUDUSD came below 0.92. Aussie weakness was exacerbated by the Westpac consumer confidence measure slipping by 4.6% in September.