Panic On The Streets Of London ... Can Scotland Ever Be The Same
Again?
There is now less than one week of campaigning remaining before the Scottish
Independence Referendum, which takes place next Thursday, September 18.
The pro-union ‘no’ vote campaign is back in the lead this week after the
latest opinion poll from pollsters YouGov put them at 52%, marginally ahead
of the pro-independence ‘yes’ campaign.
The referendum question being asked is simply “Should Scotland be an
independent country?”
After being ahead significantly since the outset of the independence
campaign, the pro-union side was abruptly shocked last weekend when the
pro-independence side took the lead based on an opinion poll result, also
from YouGov, released on Saturday, September 6.
This forced the pro-union campaign into panic mode this week with the UK
witnessing an unprecedented coordinated campaign between all the main
political parties. who are pro-union, and a number of major UK companies to
try to convince the Scottish electorate to stay in the United Kingdom.
Scotland’s financial sector became one of the main battlegrounds this
week, with many Scottish headquartered banks and financial services companies
first threatening to relocate their headquarters to London and then actually
announcing that they will move south if the referendum outcome results in a
‘yes’ majority.
The HQ move threats and announcements appeared to be part of an
orchestrated corporate campaign run by the UK’s Treasury department and the
Treasury did not deny this.
According to the banks, they are seeking to move because an independent
Scotland would create too much economic, regulatory and financial risk and
uncertainty for their headquarters to remain there.
Amongst the banks, two of the UK’s biggest banking institutions, the Royal
Bank of Scotland (RBS), and Lloyd’s led the charge. Crucially, since the RBS and
Lloyds were both bailed out by the UK government during the financial crisis,
the UK government is now a significant shareholder in both institutions,
owning a whopping 80% of the RBS and 25% of Lloyds.
RBS has been headquartered in Scotland since 1727 and employs 35,000 north
of the border. Lloyds owns various institutions including Bank of Scotland
(not to be confused with the Royal Bank of Scotland), Halifax and Scottish
Widows, the pensions and life insurance group.
Scotland’s third biggest bank, Clydesdale, owned by the National Australia
Bank (NAB) said it also planned to relocate its HQ to London, again citing
the uncertainty that a yes result would generate. Other banks such as the TSB
and Tesco Bank also followed suit and said they too would move.
Many of the banks’ and asset managers’ share prices had been hit on the
London Stock Exchange this week due to the pro-independence movement’s lead
including the share prices of RBS, Lloyds, Aberdeen Asset Management
and Standard Life.
Financial services giant Standard Life joined in, saying that it would
relocate large parts of its operations such as pensions and investments out
of Scotland if the country voted for independence. Dutch asset manager and
insurer Aegon said it too would move operations to London.
Other industry leaders also sided with the pro-union alignment with the
CEO of the UK’s largest oil company British Petroleum (BP) saying that the
company and the economy was “best served by maintaining the existing capacity
and integrity of the United Kingdom”.
Scottish first minister and pro-independence leader Alex Salmond said that
the corporate announcements had been orchestrated by the prime minister’s
office in Downing Street in London, and that Treasury had been ‘caught
red-handed in a campaign of scaremongering”.
According to the FT, a Treasury official admitted that “Danny Alexander
and George Osborne have been making calls.” George Osborne is the Chancellor
of the Exchequer and Danny Alexander is his assistant at the Treasury. The calls
to RBS would have been quite easy to make given the government’s 80%
shareholding. Likewise with Lloyds.
As RBS and Lloyds are already essentially run from London, the HQ move
announcements do appear to have been more politically motivated than anything.
HM Treasury does appear to have been bullying and pulling strings behind the
scenes. On one hand it says plans by companies to move were ‘understandable’,
while on the other hand it has been making phone calls encouraging companies
to move.
Elsewhere, Mark Carney, the Governor of the Bank of England, became
involved in the debate which is slightly surprising given that the Bank of
England is supposedly neutral of political interference. Carney said this
week that a currency union between Scotland and the rest of the UK is
incompatible with an independent Scotland.
Media mogul Rupert Murdoch chimed in, hinting that he was on the side of
pro-independence, most likely because of his current coolness towards the
Westminster leaders, while financier George Soros weighed in on the
pro-union side.
There is much to lose for the City of London’s financial sector due to the
economic uncertainty and sterling currency risk of an independent Scotland
and the loss of financial power, international standing and resources that a
smaller UK would represent.
The International Monetary Fund (IMF) also became involved this week
warning that “the main immediate effect is likely to be uncertainty over the
transition to a potentially new and different monetary, financial and fiscal
framework in Scotland.”
The pound sterling has fallen and risen this week based on the prevailing
sentiment expressed in the various independence polls. Sterling strengthened
today following the latest poll but had touched an 11 month low earlier this
week against the dollar.
In terms of sterling, the gold price has not really moved significantly
over the last month, remaining in a £20 trading range between £780 and £760,
although the price did fall from the £780 range on Monday down to £760 today,
slightly more than the US dollar denominated price move in gold, but in
in general sentiment to the weakness in the US dollar gold price.
Scotland’s bid for independence has also crystallised nationalist
aspirations in other countries, most notably in Catalonia which is on the
brink of its own unofficial referendum to try to break away from Spain.
Yesterday was National Catalan Day and millions protested across the region
most notably in Barcelona.
There has been much speculation this week about how the UK’s gold reserves
would be affected if an independence result emerges. The UK Treasury said
that all Treasury reserve assets would be up for negotiation. Since this is a
very general statement it does not provide much clarity as to whether an
independent Scotland would be able to take any of the UK ‘s gold reserves,
but this did stop various media outlets from appearing to think that Scotland
would get its share of the UK gold.
At this stage it is best to adopt a wait and see attitude since there are
too many unknowns for any factual conclusions to be reached on the future of
the UK, let alone future UK fiscal plans.
Whatever the outcome of next week’s independence referendum in Scotland,
it has illustrated that the UK is a economic entity which is in some parts
held together by groupings that do not have the same outlook. The closeness
of the results for the two campaigns suggests that if the pro-union campaign
wins, they will still have to address the concerns of the large Scottish
independence movement, and calls for a future referendum on the subject may
not go away.
Economic uncertainty in the UK will remain in the near term and it is hard
to see the UK economic landscape ever being quite the same again after the
heated campaigning on both sides of the independence issue.
MARKET UPDATE
Today’s AM fix was USD 1,237.25, EUR 957.11 and GBP 760.87 per ounce.
Yesterday’s AM fix was USD 1,247.00, EUR 964.20 and GBP 767.53 per
ounce.
Gold fell $7.90 or 0.63% to $1,242.10 per ounce and silver slipped $0.27
or 1.42% to $18.71 per ounce yesterday. For the week, gold is down 2.27%
while silver is 2.56% lower.
Gold in US Dollars - 2 Years (Thomson Reuters)
The gold price closed New York trading yesterday at $1,240.10 and fell to
a January low of $1,232 in Hong Kong overnight. Gold
in Singapore recovered to test the $1,240 level but was turned back at
$1,240 prior to going in to London trading where gold is flat.
Palladium fell 2.24% today to $829, and is down 6.53% for the week on
profit taking after reaching a multi-year high the previous week. Platinum is
trading at $1,364 and is down 0.94% since yesterday and down 2.98% on the
week.
FOMC ‘Jawboning’ Next Wednesday
A dilemma awaits the US Fed governors at the two day FOMC meeting next week
(16-17 Sept) and at the end of meeting press conference, the FOMC members
will have to decide whether to amend their interest rate forward guidance
language which currently states that Fed funds rates will be kept near zero
for a ‘considerable period’.
Gold in Sterling - 2 Years (Thomson Reuters)
Although there are now a number of Fed governors on the hawkish side, such
as the Philadelphia and Cleveland governors, will this be enough to sway a
consensus towards amending the language, and would the phrase just be dropped
or would there be conditionality added such as interest rates will remain as
is until unemployment or inflation data justifies adjusting the current
outlook?
There is a market expectation that some sort of fine tuning of the
language will occur next week. The Fed will probably subtly amend the
language while trying to keep their options open. If this happens it would
cause a short term dollar rally since the market would then expect interest
rates to rise at an earlier stage in 2015 than previously expected. And
rising interest rates mean higher nominal returns for dollar denominated
assets. In this scenario, the gold price would come under pressure due to a
stronger dollar.
With the recent non-farm payrolls growth data coming out as weak, can the
indebted US consumer and economy absorb an interest rate increase? When
interest rates begin to rise its usually part of a rising trend, not just a
one off rate rise. Are the Fed prepared to follow through with a change of
course at this early stage? These are just some of the questions that may be
answered by the FOMC press conference next Wednesday.
In our view, the Fed will probably adjust the ‘considerable period’
language at the FOMC meeting next week by adding conditionality to the
language linked to an improvement of economic performance such as
unemployment data.
If this occurs, the US dollar could have a short term rally on the back of
the FOMC announcement since this is not yet fully priced in to the US dollar.
This then is a real risk for gold because the gold price would most likely
come under pressure as the US dollar strengthens.
Any US dollar rally would in our view be short-lived, since the Fed is not
fully committed to increasing rates and is to an extent just engaged in the
management of perceptions.
Therefore, any dollar rally would probably fizzle out shortly after it had
begun. The fundamental reasons to own allocated and segregated gold remain
intact.
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