Buy Pound Sterling on Scottish Independence NOT Happening

  • Adding in on our bullish GBP/USD (via the etf FXB) position as we believe that the Scots vote down independence when the country votes next Thursday, September 18th
  • We expect the currency to retrace its move alongside strong fundamentals underpinning the cross

We did not see the Scottish Independence threat manifesting like it has. In fact, UK high frequency data has shown a strong positive divergence over continental Europe in recent weeks, which we believe is supportive to our thesis. 


That said, the GBP/USD (etf FXB) has clearly been battered down:  -5.8% since a high on 7/2; -2.6% month-to-date; and over -1% intraday (the weakest levels since late November 2013). It has moved in step over the last two weeks as the spread between “No” versus “”Yes” votes for Scottish independence has come in considerably to the Yes side - to a 2% advantage according to a YouGov poll released over the weekend.

Buy Pound Sterling on Scottish Independence NOT Happening - z. yougovb

Buy Pound Sterling on Scottish Independence NOT Happening - z. gbp anno

Ultimately we think the myriad of economic risks presented by a "Yes" vote (listed below) will outweigh the more popular sentiment shift over recent weeks – which has been driven alongside a campaign by Scotland’s First Minister Alex Salmond to appease fears presented by secession – however be prepared for a close vote.  Also note, betting markets are not buying into Scottish independence, with No = 71%; Yes = 29%.


Secession Risks:

  • Currency –  UK politicians have stated that Scotland could not use Sterling. The country would have to issue its own currency
  • Central Bank – until the formation of a central bank there is no backstop for sovereign debt
  • Massive Capital Flight –investors could pull money out of Scottish banks en masse that would destabilize the financial system 
  • EU Membership – it’s unclear if an independent Scotland would be granted EU membership, which could have huge trade implications
  • Regulation – uncertainty if banks would remain regulated under the UK regulatory authority? Tax and trade regulations also uncertain
  • Economic Drag – prominent financial firms likely to move to London
  • Budget –  the Institute for Fiscal Studies pointsout that Scotland's Deficit could be 4.6% if independent. Low credit quality could negatively impact debt raises, and push the country's debt and deficit levels higher, a vicious cycle

While Salmond’s "Yes" campaign has been driven on the promise that an independent vote will allow the country to capitalize on oil wealth and enable the government to improve its system of social welfare, we size up his campaign rhetoric as over-promising and under-delivering. 


The myriad of economic risks (presented above) may in fact leave the average citizen at a disadvantage as the economy grows at a slower rate with less jobs. Add on the uncertainty around the promise of “oil wealth”:  while more than 80% of Britain’s oil lies in reserves with Scotland’s maritime borders, how the reserves would be divided is uncertain, with no certainty that an independent Scotland would get the long end of the stick.


Matthew Hedrick


Cartoon of the Day: Smells Like 2007

Takeaway: "I haven’t been this bearish since the fall of 2007," Hedgeye CEO Keith McCullough wrote in today's Morning Newsletter.

Cartoon of the Day: Smells Like 2007 - smells like 2007 09.08.2014

Q&A | McCullough: I Haven’t Been This Bearish Since 2007

Short EWI – Italy Has Yet To Find A Bottom

Last Friday Keith added a short signal in Italy (via the etf EWI) to our Real-Time Alerts. We were tactically afforded the opportunity to short EWI as Italian stocks have bounced to lower-highs but remain bearish TREND (21,525 in the FTSE MIB Index).

Short EWI – Italy Has Yet To Find A Bottom - w. italy mib


Getting Short Persistent Italian Underperformance


Our thesis on Italy is relatively simple:

  • GDP Underperformance – a 2H deceleration should lead to 2014 Italian GDP flat to -0.3% versus +0.6% to +0.8% in the Eurozone. 
  • Sticky Unemployment – we expect the unemployment rate to be grounded at 12-13% for the remainder of the year, versus Eurozone average of low to mid 11%.  Italy’s monster Youth Unemployment of 42.9% will continue to present a real drag on confidence and extend the length of a “recovery” over the medium term TREND and pose a generational drag over the long term TAIL.
  • Fiscal/Budget Squabbles – we continue to get mixed signals from the Renzi government. More fiscal consolidation or less?  The lack of a definitive voice should only provide further uncertainty to the populous and dampen consumer confidence around an inflection: late last week undersecretary at the economy ministry Enrico Zanetti said that Italy may seek to delay bringing its structural budget deficit into balance until 2016 (versus the previous guidance of 2015).
  • ECB is No Savior – despite cutting the main interest rates to near zero and deposit rates to negative first in June, the policy move to further cut last week will not lead to increased lending to businesses that are willing to invest in and grow the European economy. We expect investment to the region, and Italy in particular, to remain severely challenged over the medium term.  
  • Regional Partners Also Weak – we have monitored weeks and months of declining data across the region and our propriety GIP model (growth, inflation and policy) for assessing economies suggests the Eurozone economy will land in the ugly quads #3 and #4 in 2H, representing growth slowing as inflation decelerates/accelerates. With 54% of Italy’s exports heading to EU countries, we suspect that weaker demand from the EU in 2H will continue to put downward pressure on growth. 

Short EWI – Italy Has Yet To Find A Bottom - EUROZONE


Just Charts

Below we show 4 charts that are representative of Italy’s underperformance.

  • Italy’s PMI Services for the August reading ticked below the 50 line, indicating contraction
  • Italy’s Unemployment Rate is poised to remain above the Eurozone average
  • Italian Retail Sales have inflected back to the downside
  • Italian Economic Sentiment inflected downward in the August reading – we expect further declines in 2H

Short EWI – Italy Has Yet To Find A Bottom - W. Italy PMI

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY UNEMPLOY

Short EWI – Italy Has Yet To Find A Bottom - w. ITALY RETAIL SALES

Short EWI – Italy Has Yet To Find A Bottom - W. ITALY SENTIMENT


Matthew Hedrick


Keith's Macro Notebook 9/8: Europe | Oil | UST 10YR

Daily Trading Ranges, Refreshed [Unlocked]

Takeaway: This is a complimentary look at our proprietary buy and sell levels on major markets, commodities and currencies.

This note was originally published September 08, 2014 at 07:45 in Daily Trading Ranges. Click here to learn how to subscribe.

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