Scotland's decision to reject independence from the United Kingdom shored up British stocks on Friday but worries over future constitutional changes kept a lid on the relief rally.
With all 32 Scottish councils having declared, the No campaign won 55.3 per cent of the votes cast in Thursday's referendum against 44.7 per cent who backed independence. The 10-point or so victory margin was wider than expected — most opinion polls were predicting a narrower 4-point victory for proponents of the union with England, Wales and Northern Ireland.
The FTSE 100 of leading British shares was up 0.7 percent in morning trading as investors breathed a sigh of relief that a host of thorny economic issues were not triggered by a Yes vote. By mid-afternoon it had sunk lower, as they weighed the uncertainty ahead.
'It might not have been financial meltdown territory, but the markets almost certainly would have been in turmoil this morning if the Scots had voted yes.'- Dennis de Jong, managing director at UFX.com.
As well as worries over what currency an independent Scotland would use, investors had concerns over how the U.K.'s £1.3 trillion debt would be split. There were even fears that a Yes vote may 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 this morning 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 was up three per cent, Lloyds Banking Group PLC rose two per cent. Oil giant BP PLC, which has sizeable operations off the shores of Scotland, was up 1.5 per cent, too.
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 registered 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."
The blue-chip FTSE 100 index was up 32 points, or 0.5 per cent, at 6,851 at 3 p.m. London time, but is still down on the month, because of a run on stocks in the leadup to the vote.
The No vote in Scotland encouraged investors throughout the world. Tokyo's Nikkei stock index rose 1.13 per cent to its highest close since early January, with a sharply weaker yen boosting exporter shares.
U.S. stocks, which pushed both the Dow and the S&P 500 to new records Thursday, opened higher Friday.
In London, trading volume in RBS and utility Scottish and Southern Energy was particularly strong as both companies had seen a hit leading up to the referendum.
In the currency markets, the pound was faring less well than stocks, partly because it had already rallied strongly this week on expectations of a No vote.
Having earlier risen to a two-year high of 1.2817 euros, the pound settled around the 1.2703 euros in European trading, down on the day. Against the dollar, the pound was down at $1.6314.
Uncertainty over the pound was likely a key element in the No campaign's victory. Last week, the pound took a battering after opinion polls indicated the vote would be closer than anticipated.
A key 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's left of the U.K. but the main British political parties insisted that wasn't going to happen.
The vote not only keeps Britain intact, but also reduces the likelihood it would leave the European Union, potentially a much greater risk for markets. (Chris Ratcliffe/Associated Press)
"There is nothing like uncertainty about the money in your pocket to sharpen the minds of voters," said Derek Halpenny, head of global markets research at the Bank of Tokyo-Mitsubishi UFJ.
Now that the independence referendum is over, the focus in markets is swiftly moving on.
The rise of the pound over the last week is putting pressure on exporting stocks, which stand to lose business as the price of their goods rises. Companies such as Imperial Tobacco and Rio Tinto saw their stocks decline, offsetting the ebullience in shares linked to Scotland.
In particular, there are some concerns about how powers will be devolved to Scotland, as promised, and to the rest of the U.K. In a statement Friday, Prime Minister David Cameron said he was looking at a broad-based constitutional rejig in the U.K.
"The Scottish referendum may be over, but political uncertainty is here to stay in the U.K.," said Kathleen Brooks, research director at Forex.com. "Markets tend to be fearful of political uncertainty, especially when it could change the political landscape in a major global power like the U.K."
Cameron has promised more autonomy, including new taxing powers, to the Scots.
That pledge to rethink the union won't stop at the Scottish border, as Wales and Northern Ireland will be keen to see what powers they can wrest in the process.
Britain's economy has been in rebound this year, with growth of 3.2 per cent in the second quarter, its best performance in six years.
Bank of England governor Mark Carney has begun musing about raising interest rates next year, as U.K. inflation hovers near the target rate of two per cent. Those indicators may not stay on track during a protracted period of negotiations over the union.
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