So far it’s only FX getting buffeted by the Scottish Independence vote and the possibility of a split.
The Scottish independence movement got a big boost this weekend when a YouGov poll put the Yes vote ahead of a No vote. While a split would have wide-reaching implications, investors have been mostly sanguine about it. That is with the exception of the FX market, where the British pound has been, well, pounded. Another impact is the fact that it is much more expensive to protect yourself against sterling weakness as hedge costs have soared. The referendum is scheduled for September 18.
However, says financial information services firm Markit, despite the tightening polls “investors have barely reacted in the run-up to Scotland’s upcoming referendum.” As examples of the market’s indifference, Markit points out that short interest in Scottish domiciled FTSE 350 companies has actually fallen 10 percent over the last month, implied volatility for FTSE 100 options “hasn’t moved” and UK CDS spreads “have remained near recent lows.”
What’s behind the calm? Markit says that since the pound has been “the key point of contention” for the independence movement, it is what is being roiled the most. And FX markets hate uncertainty. Says Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman & Co in a note to clients: “The market was trading more on uncertainty than certainty. Until this past weekend, the Scottish referendum was not a major market factor as few took seriously the risk of a “yes” vote.”
As for CDS and shorts, it’s likely the split will have less of an impact. Any equity-market impact would likely be localized and small. And, “in the fixed income world, CDS investors have not priced in any issues with UK sovereign debt over the last few weeks,” Markit says. Some speculate that the UK would just write off Scottish debt.