By Josie Cox and Tommy Stubbington
Surging support for Scottish independence ahead of a referendum
next week roiled markets Monday, sending the British pound sharply
lower and hitting stocks in banks and other businesses likely to be
most affected by a victory for the separatists.
The turmoil came after a poll over the weekend showed that the
number of those favoring Scottish independence had eclipsed those
opposing a split, a dramatic shift from a few weeks ago when the
pro-union campaign held a strong lead.
"The vote has moved from being something three or four weeks ago
that we didn't need to focus on, to something we need to think
about [in terms of] how it affects our portfolios," said Paul
Lambert, head of currency at Insight Investment, which oversees
$472 billion of assets.
Sterling dropped as much as 1.3% to $1.6103, its lowest level
since November last year. It traded at $1.6150 as European stock
markets closed. The euro gained 1.1% against the pound to
GBP0.8016.
Citigroup said in a note that sterling could slump as low as
$1.56 in the event of a "yes" vote--a move chiefly triggered by a
lack of clarity on what currency a new independent Scotland would
use.
In equity markets, companies with large exposure to the Scottish
economy were hit hardest, with investors deterred by the
uncertainty surrounding the implications of Scottish independence
on regulation, tax and therefore revenue streams.
The U.K.'s FTSE 100 index closed 0.3% lower, having earlier
fallen as much as 1%. Scottish-domiciled firms including Royal Bank
of Scotland Group PLC , Standard Life PLC and SSE PLC were among
the fallers.
BNP Paribas credit strategists Gildas Surry and Geoffroy de
Pellegars wrote in a note that a vote for independence could
"significantly impact" RBS's credit rating, as well as increase
compliance, operational and funding costs.
Shares in RBS have drifted 5.6% lower since the start of
September.
On Saturday, a YouGov poll showed 47% of those surveyed were now
likely to vote "yes" to independence, while 45% would likely say
"no." The rest of the 1,084 voters polled Sept. 2-5 said they were
undecided or wouldn't vote.
Paul Donovan, an economist at UBS, said that, even if the
pro-unionists took the lead on September 18, the latest figures
raise the risk of what he dubs a "Québécois scenario"--a narrow
rejection of independence that leaves open a risk of a further
vote. "We believe this would have implications for banking, gilts,
direct investment into Scotland--from overseas and the rest of the
United Kingdom--and sterling, " he said.
Alastair Thomas, head of rates and treasury at ECM Asset
Management, meanwhile, stressed that, whatever the outcome, the
impact was likely to be prolonged. In the event of a "yes" vote, he
said, it could take up to 18 months before all the details are
agreed.
"One could even imagine a delay in the start of U.K. rate hikes
due to economic uncertainty, which is why sterling is being sold
this morning," he said.
Already last week, the currency came under severe pressure as
polls showed a narrowing of the two camps. Gilts and equities
underperformed moderately too, while implied volatility rose.
On Monday, currency strategists at Barclays said that
derivatives that protect users from sharp shifts in sterling are
seeing ferocious demand.
"The abruptness of the shift in one survey should be viewed with
caution, but nonetheless reinforces our long-held view that
Scotland's independence referendum is a serious event risk, not a
tail risk," they wrote.
The currency has now fallen more than 5% from its high in July
of $1.7190.
Government bond markets, however, showed little reaction
Monday.
The yield on the U.K.'s 10-year gilt contract was steady at
2.490%.
Nick Gartside, chief investment officer for fixed income at J.P.
Morgan Asset Management, which manages $1.65 trillion of assets,
said that this was chiefly because the debate isn't materially
impacting the U.K.'s perceived ability to service its debt.
"In the U.K., that is exceedingly high and will be no different
following any vote or poll," he said.
Back in equities, there are also some investors who are
suggesting a silver lining for markets.
"In general, the U.K. consumer sector was hit quite hard by
sterling strength," said Colin McLean, managing director and
founder of Edinburgh-based fund manager SVM Asset Management. "I
think generally a weaker pound could support, especially some of
the retailers, as well as other consumer sector names," he
added.
Write to Josie Cox at josie.cox@wsj.com and Tommy Stubbington at
tommy.stubbington@wsj.com