Scotland’s decision to reject independence from the United Kingdom gave British markets a short-term lift Friday, but worries over future constitutional changes kept a lid on the relief rally.
The No campaign won 55.3 percent of the votes cast in Thursday’s referendum, against 44.7 percent who backed independence. The margin was wider than expected – most opinion polls on the eve of the vote were predicting a narrower, 4-point victory for proponents of the union with England, Wales and Northern Ireland.
Investors breathed a sigh of relief that a host of thorny economic issues were not triggered by a Yes vote. The FTSE 100 index of leading British shares ended up 0.3 percent at 6,837.92, but had been higher earlier in the session.
In addition to worries over what currency an independent Scotland would use, investors had concerns over how the U.K.’s 1.3-trillion-pound ($2.1-trillion) debt would be split. There were even fears that a Yes vote might have triggered a bank run. The uncertainty was so great that Bank of England Governor Mark Carney flew back early from a summit in Australia.
“It might not have been financial-meltdown territory, but the markets almost certainly would have been in turmoil if the Scots had voted Yes,” said Dennis de Jong, managing director at UFX.com.
Those companies with Scottish connections outperformed the general market. Among them, Royal Bank of Scotland PLC closed up 2.5 percent, while Lloyds Banking Group PLC rose 1.3 percent.
Royal Bank of Scotland, which is majority-owned by the U.K. government since receiving a bailout during the financial crisis in 2008, said it was abandoning a contingency plan that included moving its head office down south to England.
“That contingency plan is no longer required,” the bank said in a statement. “Following the result it is business as usual for all our customers across the U.K. and RBS.”
In the currency markets, the pound suffered a bit of a reverse Friday, as traders raked in profits accumulated over the past week when the currency rallied strongly on growing expectations of a No vote.
Having earlier risen to a two-year high of 1.2817 euros, the pound settled around the 1.27-euro mark, down slightly on the day. Against the dollar, the pound was down 0.8 percent at $1.6320, but still over two cents higher than it was ten or so days ago, when the Yes campaign looked like it could win.
Uncertainty over the pound was likely a key element in the No campaign’s victory. A big concern had been what currency an independent Scotland would use. The Yes campaign had hoped it would still use the pound through a currency union with what would have been left of the U.K., but the main British political parties insisted that wasn’t going to happen.
Now that the independence issue has been resolved, the focus in markets is swiftly moving on. Late on in the campaign, Scotland, which has its own Parliament responsible for a wide array of policies such as health and education, was promised further devolved powers from London.
Cameron’s statement to create a “balanced settlement, fair to people in Scotland and importantly to everyone in England, Wales and Northern Ireland as well” suggests more reforms are likely to be proposed as part of a broad-based constitutional rejig in the U.K.
“Precisely what this will entail may be unclear for some time, but it adds an additional coating of uncertainty to that provided by the 2015 general election that could keep the pound firmly on the back foot for the remainder of the year,” said Neil Mellor, senior currency strategist at Bank of New York Mellon.
Moody’s Investor Services later maintained its “Aa1” rating and stable outlook on the U.K.’s government-backed bonds.
“While the political process going forward will likely lead to further devolution of powers to Scotland and some changes in the fiscal transfers, the rating agency does not anticipate that these will have a material impact on the quality of the U.K.’s institutions, or its financial strength,” Moody’s analyst Sarah Carlson said.