Europe’s Markets Rise, Then Sputter After Scotland Votes No

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SHAFAQNA (International Shia News Association) Financial markets in Britain and around Europe generally welcomed Scottish voters’ rejection of independence on Friday, reflecting relief that the United Kingdom would not face a tumultuous breakup and a prolonged period of uncertainty.

Yet as the reality set in that Britain still had plenty of economic and political issues to grapple with, an early rally in the pound quickly faded. And stocks, which had been broadly higher early in the day, were soon mixed.

“We’ve taken what could have been an enormous amount of uncertainty and weighty issues and traded it for a smaller amount of uncertainty and weighty issues,” said Malcolm Barr, an economist at JPMorgan Chase.

For the markets, the uncertainty includes when the Bank of England will raise interest rates and what Britain’s future role in theEuropean Union will be.

In addition, Prime Minister David Cameron promised Friday morning to honor the pledge that he and other party leaders made to give Scotland more autonomy in taxation and spending, but he suggested he would seek similar autonomy for England, too.

“Just as Scotland will vote separately in a Scottish parliament on their issues of tax, spending and welfare, so too England as well as Wales and Northern Ireland should be able to vote on these issues, and all this must take place in tandem with and at the same pace as the settlement for Scotland,” he said.

The British currency rose sharply in early Friday trading, reaching its highest level against the dollar in more than two weeks, before falling to $1.63, down about 0.7 percent for the day.

Stocks showed early gains in markets across Europe before settling down around midday. In London, the FTSE 100-stock index was up 0.3 percent, and the broader Euro Stoxx 50 index was up less than 0.1 percent. In the United States, the Standard & Poor’s 500-stock index fell less than 0.1 percent, or 0.96 points, to 2,010.40, but finished with its best weekly gain in a month. The Dow Jones industrial average rose less than 0.1 percent, or 13.75 points, to 17,279.74.

In the United States bond market, the yield on 10-year Treasury notes fell to 2.58 percent from 2.62 percent. The price rose by 11/32, to 98 8/32.

“As expected, there was a knee-jerk reaction up on the pound,” said Harry Adams, a managing director at Argentex, a currency advisory firm. “All those gains have been erased, and the reason for this is Westminster now has to deal with the hangover.”

Mr. Cameron’s comments after the vote surprised some. Although his Conservative Party was forced to offer Scotland more autonomy as part of a last-minute plea for it to remain a part of the United Kingdom, he has now proposed a significant overhaul in governance.

The so-called the West Lothian question, named after the constituency of the member of Parliament who posed it in 1977, relates to the fact that lawmakers who represent other parts of the United Kingdom — Wales, Northern Ireland and Scotland — have a say in matters that affect only England, but English members of Parliament do not have a say on such matters in those areas. Some have called for a separate English Parliament.

“Millions of voices of England must not go ignored,” Mr. Cameron said.

Beyond the politics of Westminster looms the question of whether Britain will stay in the European Union.

Mr. Cameron has called for a referendum on European Union membership by 2017, and many economists believe that a Scottish vote for independence would have fueled support for an exit from the 28-nation bloc. Though it may not be accelerated, the issue is still on the table.

“I think the incremental movement is still in a direction making a referendum more likely rather than not,” said Mr. Barr of JPMorgan.

The results, announced in Scotland early Friday, showed 55 percent of voters against independence to 45 percent in favor.

With the referendum out of the way, the markets will refocus on every word from Mark J. Carney, the governor of the Bank of England, to try to figure out when the first interest rate increase will be.

A Scottish “yes” vote would have put off that day of reckoning. It is now expected in the first or second quarter of next year.

The pound was a gauge for sentiment on the vote, Mr. Adams of Argentex said. It started the year at $1.66 and rose as high as $1.72 in the first six months.

On Sept. 7, it fell sharply after one poll showed the independence camp pulling ahead. The sell-off reflected fears of a political breakup, uncertainty over what currency an independent Scotland would use and questions about what independence would mean for Britain’s membership in the European Union.

But as fears receded that the “yes” vote would prevail, the pound rallied against the dollar, peaking at about 5:30 a.m. on Friday, when the initial vote results came out.

Many economists were quick to note on Friday that the respite could be short.

“The U.K. has been changed forever by this referendum,” said Rob Wood, an economist with Berenberg Bank. “The majority of Scots have voted to remain in the U.K., but not under the old status quo.”

“The risk of huge disruption from Scottish independence is gone,” he said. “Not for good, given the still high support for a ‘no’ in the polls, but for a considerable time.”

 

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