Like so many once-mighty conglomerates, the United Kingdom may break up.
Thursday’s elections in the U.K. feature a mishmash of races, including for the mayor of London, but the most important for financial markets are for the Scottish Parliament.
The pro-independence Scottish National Party, led by Nicola Sturgeon, may claim a majority in the 129-seat parliament — and even were it to fall short, it could possibly govern with the Green Party, which also favors independence. This would set the stage for a request for a second independence referendum, after the failed 2014 attempt.
A request would be just that — the U.K. government headed by Prime Minister Boris Johnson would have to agree, and so far, he has been consistently against holding a Scottish referendum.
“The stronger the support for the Scottish National Party, the greater the pressure they may feel they can exert on the U.K. government to push for a second referendum on Scottish independence. We note that the SNP has been losing support in recent polling, so whether they can eke out a majority in the Scottish Parliament remains in the balance,” said George Buckley, chief U.K. economist at Nomura.
Analysts at ING pointed out that the 2014 referendum didn’t have a major impact in the currency market, and they don’t expect a big move this time around either for the currency pair most affected, the pound vs. the euro
They pointed out that any second Scottish referendum would be years away — and markets didn’t start pricing in the Brexit referendum until six months ahead of the event.
There is also the small matter that polls don’t actually show Scots favoring independence, though they are incredibly close — Politico’s polling average has pro-union voters with a narrow 2-point lead. An independent Scotland would have to tackle thorny issues including what currency to use and how to divide assets like North Sea oil and debts.
“I’d be bearish on a Scottish currency if they had one,” quipped Kit Juckes, the London-based head of currency strategy for French bank Société Générale.
Still, a move toward Scottish referendum could take some of the air out of the sale of U.K. stocks. The midcap FTSE 250
which is considered more of a play on the U.K. economy than the large-cap FTSE 100
has gained 10% this year.
“We’d expect to see some closing out of long U.K. reopening bets that were placed on the back of the effective domestic [COVID-19] vaccine rollout in 1Q21,” said Viraj Patel, senior strategist at Vanda Research.
Voting for the Scottish Parliament ends Thursday night at 10 p.m. (5 p.m. Eastern), and the Scottish results — a mix of constituency and regional votes — may take until Saturday to be fully tabulated.
There also will be a parliamentary by-election for the U.K. House of Commons, in the northeastern town of Hartlepool, with polls suggesting Johnson’s Conservatives will easily triumph over the Labour Party led by Keir Starmer. The U.K.’s successful COVID-19 vaccination campaign appears to be carrying the day for the Tories, with recent reports about Johnson’s financial ties to donors doing little to move polling.
Sadiq Khan is expected to comfortably win re-election as London’s mayor and keep the capital in Labour’s hands.