Markets expect negative overnight rates in the Eurozone through mid 2016 as reserves become a "hot potato"

by Sober Look

Last week's unexpected decision by the ECB to set the rate on bank excess reserves to -0.2% is sending liquidity holders scrambling. The idea behind negative rates is to penalize cash position holders. The amount of reserves in the Eurosystem is constant at any one time, so the penalty-carrying reserves just bounce around from bank to bank like a "hot potato". The ones stuck with liquidity overnight will pay the 20bp penalty. The ECB hopes this will force the banking sector into more lending, with some lenders preferring extra credit risk over the pain of holding reserves.
Of course a great deal of this is wishful thinking, as undercapitalization and deleveraging (combined with tepid demand) will continue to plague credit creation. Quite soon the Eurozone banks will be forced to raise massive amounts of equity capital in order to improve leverage ratios (see story) and additional lending would require even more capital raising. The timing is not great.
So what are banks doing with their cash? The easiest option is to buy sovereign debt, particularly short term notes. Government paper has minimal to no impact on regulatory capital needs and does not cost banks the 20bp charged by the ECB. That's why banks (and others) are willing to (in effect) pay the German government to hold some of their excess liquidity. Below is the chart of German 6-month bill yield.

Banks are also trying to lend to each other as liquidity sloshes through the system. Taking bank credit risk does raise capital requirements, but if limited to the higher rated banks, the marginal capital needs for those loans are relatively small. Of course the better rated banks are taking advantage of this situation by funding themselves in the interbank market at zero to negative rates. The chart below is the EONIA (overnight) interbank rate (equivalent to the Fed Funds rate in the US).

Source: ECB

Moreover, the forward markets are now pricing EONIA rates to stay firmly planted in the negative territory through at least the mid-2016. The chart below shows the forward curve before and after the ECB action.

Source: Natixis

As the ECB expands its balance sheet via the TLTRO program, excess reserves in the banking system will grow. This liquidity will become increasingly expensive due to sheer size of cash balances that are costing banks 20bp. That's why the market expects even lower EONIA rates going forward, as banks pay more to avoid getting stuck with large overnight reserve balances.
Just as Japan is getting caught in what is becoming a perpetual quantitative easing program (see discussion), the Eurozone is looking at negative rates for some time to come. The unprecedented monetary experiments by global central banks will be with us far longer than originally expected.

See the original article >>

"We" Don't Want The Ukraine Ceasefire To Hold

by Raul Ilargi Meijer

It’s exceedingly safe to assume that the main reason the Kiev government agreed to a ceasefire on Friday was that the Ukraine army was losing on just about all fronts. Which they blame on Russian troops and weaponry being involved in increasing numbers, but there’s still to this day no proof for that.

The ‘rebels’ suspect that Kiev will use the ceasefire only to regroup, send in more men and guns, and fortify its positions. Moreover, the same ‘rebels’, who in the western press are increasingly awarded the “pro-Russian” label, even though they have no intention of joining Russia, have accused Kiev of having already violated the ceasefire within hours of it being announced.

Does anyone truly believe the US/EU/NATO coalition, which has spent billions on their Ukraine regime change project, are going to leave it at this? That they’re willing to admit defeat and will now retreat to their original positions, minus East Ukraine? If so, please have a look at the Brooklyn Bridge I have up for sale on Ebay. It has an absolutely lovely weathered look, literally tons of patina, and a history to die for.

I still haven’t seen one single western journalist take an in-depth look at the role of Victoria Nuland, Geoffrey Pyatt and their EU accomplices. Nobody seems interested in what these people have done over the past years that led up to Yanukovych’ ouster in February, and the subsequent civil war Kiev unleashed upon its own people. Not one single western journalist. And it’s not as if there’s no story there.

Meanwhile, the demonization of Vladimir Putin by those same journalists continues unabated. I saw something pass by just now about a Ukrainian priest claiming Putin is obsessed by Satan, no less. That’s the sort of thing that is duly reported in the west. Not Victoria Nuland.

And western politicians too play the same grossly over the top game like they were born for it. US officials have announced they will ‘degrade’ Islamist State (Obama) and chase them into Hell where they belong (Joe Biden). That’s the kind of language that ‘earns’ them applause.

As if there’s nothing wrong with using the images of an American being decapitated for hollow political gain. As if honor has nothing to do with it. In the exact same way that using 298 deaths on flight MH17 didn’t keep anyone from assigning blame, in graphical terms and without any evidence. I guess this is welcome to the age of communication. The more there is, the more is hidden. Perhaps there comes a point where communication equates to propaganda, where information can’t help turning into spin.

But so, yes, I don’t see the west giving up on Ukraine anytime soon. But I don’t see either the Donbass people, or those who support them, doing so either. And the more bases and attack and defense systems, and rapid deployment troops, NATO positions ever close to Russia’s borders, the more Moscow will feel obliged to counter-act.

It’s a stupid way to deal with things when you have two heavily militarized forces opposite each other. But it’s what we see develop as we’re watching. And it looks as if the media war in the west has been won by the west, to the extent that nothing that can be said from here on in will ever be able to wipe the completely invented anti-Putin allegations from our cumulative unconsciousness.

Even if Tuesday’s preliminary MH17 report by the Dutch Safety Board, for which reportedly so many detectives were engaged that no other crimes were solved at all the past two months or so, points not to Putin or Donbass rebels as the guilty party or parties, the allegations against them will still be left in everyone’s unconscience.

Not that I think there’s much chance of that; My guess is the preliminary report will leave so many questions open that there’ll be plenty room to keep the suspicions against Russia and the Donbass alive. The full report won’t be concluded until next summer, so the artificially induced bad taste can simmer and fester for another year.

But I’m still curious to see the report. As I am to see the Russian Union of Engineers’ report which we will present here at the Automatic Earth shortly.

To get back to why I started writing this, I don’t see a truce or ceasefire holding for long. The ‘rebels’ have a lot of reasons to keep fighting: first off, there were winning, and second, they were on their way to establish a land bridge to the Crimea, which would lift their isolation.

And as I said, I don’t see the west give up on their expansionist project. They can now make all of their people believe it was Putin who violated the 1997 NATO-Russia Founding Act (not that anyone has any idea what that is), that NATO is right to expand eastward, even if it’s obvious that Russia can only respond by countering that expansion with force.

The west will find a reason to blame the other side, rebels or imagined Russians, for violating the ceasefire, and use it to increase its military power. Americans and Europeans alike have so far taken all the ‘news’ they were served hook line and sinker, and why should that change? In other words, US/EU/NATO are free to do whatever they want, as long as they can spin a somewhat credible anti-Putin line in their media. And just about any line is credible by now.

But the ceasefire will truly stop when conditions are laid upon the table. Kiev will never ever again rule over the Donbass, the sole region to make Ukraine an economically viable entity. The gory and bloody attempts over the past 6 months to subdue the east Ukraine population have failed, and there won’t be a second chance.

What’s left of the Donbass after the shelling by its own official government will not agree to be governed by that same government. Ukraine as we draw it on the map today has ceased to exist. But that doesn’t mean the west won’t be willing to give it another try.

No matter how awry this goes, the likes of Obama and Barroso and Juncker still think they’ll win because they have bigger dicks a.k.a. guns. And the guys behind the curtains are laughing out loud. They have the ‘bigger’ view.

See the original article >>

JPMorgan Stunner: "The Current Episode Of Excess Liquidity Is The Most Extreme Ever"

by Tyler Durden

Curious why everything is being bought in the aftermath of last week's ECB's unprecedented announcement, and both bonds and stocks are either at or just shy of record highs ignoring completely the worst US nonfarm payroll print of 2014? JPM's Nikolaos Panigirtzoglou explains why.

From "The ECB's liquidity boost", here first is the background on where in the global central bank central-planning experiment we stand right now:

The ECB President stated in this week’s press conference that the ECB’s forthcoming programs, i.e. TLTROs coupled with ABS and covered bond purchases, could take the ECB’s balance sheet back to early 2012 levels, i.e. to €3tr from €2tr currently. These remarks, not only suggest that the ECB might have a target in mind regarding the size of its balance sheet, but raise questions about the boost to global liquidity from prospective ECB actions.

In aggregate, G4 central balance sheets started rising rapidly from the end of 2010 driven by the Fed’s QE2 followed by the BoE’s QE, ECB’s LTROs, Fed’s QE3 and BoJ’s QE. As a result of these central bank actions, G4 central bank balance sheets expanded by almost $4tr over 4 years i.e. by $1tr per year since the end of 2010 (Figure 1). With the ECB aiming at a €1tr expansion of its balance sheet, this $1tr per year pace in G4 central bank balance sheet expansion is likely to increase rather than decrease from here, despite the Fed’s tapering. The BoJ is already expanding its balance by close to $650bn per year, so adding a similar pace of increase for the ECB’s balance sheet (€500bn or $650bn per year) should result in an annual pace of G4 central bank balance sheet expansion of $1.3tr, even as the Fed ceases bonds purchases.

This ECB-driven quantitative expansion is hitting the global financial system at a time when liquidity is already very high. And this is true for both “narrow” or “banking sector liquidity” and “broad” or “non-bank sector” liquidity.

The G4 banking system is already flooded with excess reserves of around $4.5tr i.e. reserves commercial banks have with central banks in excess of what they need to meet usual liquidity needs. Given that the banking system cannot get rid of reserves in aggregate, these zero yielding reserves become the “hot potato” that banks try to pass to other each until the relative pricing is adjusted enough to remove the incentive for banks to get rid of these reserves. With the ECB aiming at increasing the amount of excess reserves even further via its TLTRO/bond purchase programs, G4 narrow or banking sector liquidity should exceed $5tr, exerting even more downward pressure on 2-5 year government bond yields of core countries, the preferred habitat of banks.

This is where global liquidity currently stands:

To assess excess money supply, we update the model we previously published in Flows & Liquidity, Apr 26th 2013. Beyond nominal GDP and financial wealth, i.e. the stock of tradable bonds and equities in the world, the model includes an uncertainty variable. Uncertainty is important as it makes agents hold more cash during periods of elevated risk perception, for precautionary reasons. We proxy uncertainty via the US monthly index constructed by Baker, Bloom and Davis. To measure policy-related economic uncertainty, they construct an index from three types of underlying components. One component quantifies newspaper coverage of policy-related economic uncertainty. A second component reflects the number of federal tax code provisions set to expire in future years. The third component uses disagreement among economic forecasters as a proxy for uncertainty. This uncertainty proxy is shown in Figure 2 along with its smoothed version. This uncertainty proxy declined sharply over the past two years and has completely unwound the post Lehman increase.

To estimate the gap between money supply and a medium-term demand target, we regress real money balances, global M2 deflated by global CPI, against 1) real GDP (i.e. the level of nominal GDP deflated by global CPI), 2) real financial wealth (i.e. the total capitalization of global bonds and equities deflated by global CPI), and 3) the uncertainty proxy described above. To remove the impact of FX changes from our global money stock measure, we aggregate the M2 stocks of various countries at constant (today’s) exchange rates. The regression results are shown in Figure 3. All three variables are statistically significant with a positive sign as predicted by theory.

Excess (i.e. the residual in our model) money supply is currently in record high positive territory. The current residual suggests that global money supply which stood at $68tr at the end of August is $5tr above our estimated medium-tem money demand target. The residual of the regression turned positive in May 2012 and has risen steadily since then. This is both because of real money supply increasing and money demand decreasing due to lower uncertainty (Figure 2: Global M2 reached $68tr in August this year and is up by $15tr or 29% since the end of 2010 when G4 central bank balance sheets started rising rapidly. The capitalization of both bonds and equities in the world had risen by a similar 31% over the same period and the current pace of M2 growth suggests that global equities and bonds should continue to grow by at least 6% per annum.

Of this $15tr increase in global M2 since end 2010, $5tr was due to G4 and the rest $10tr was due to the rest of the world, mostly EM. Strong credit growth in EM economies has boosted our measure of excess liquidity in recent years and this force led by China continues unabated. It is often mentioned that this Chinese or EM liquidity is trapped within EM. We disagree. It is true that domestic economic agents in China and other EM economies face restrictions in deploying their capital abroad. But domestic liquidity in China and EM is channeled to the rest of the world via reserve accumulation, i.e. via the official sector, as capital restrictions put upward pressure on EM currencies.

The punchline:

Prospective ECB actions are likely to widen the above $5tr estimated gap between global money supply and demand. That is, the ECB's quantitative expansion is hitting the financial system at a time when broad liquidity is also very high. The rise in excess liquidity, i.e. the residual in the model of Figure 3, is supportive of all assets outside cash, i.e. bonds, equities and real estate. The current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the ECB actions have the potential to make it even more extreme, in our view. Before then, there were three major episodes of excess liquidity (i.e. positive residual) in our model: 1993-1995, 2001-2006 and Oct 2008-Sep 2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at the time.

You don't say.

It is also important to note that liquidity is not constrained by borders. For example, foreign institutions could also sell ABS or covered bonds to the ECB, so the prospective injection of liquidity by the ECB could reach foreign as well as domestic institutions. Anecdotally, both the Fed and the BoE have bought significant amount of bonds from foreign institutions during their QE operations. In addition, in a global and interlinked financial system, via arbitrage, the ECB operations can end up suppressing yields of higher yielding bond universes outside the euro area by more than domestic bonds.

Finally, add JPM to the long list of entities, from billionaires Icahn, Zell, Soros, Druckenmiller, to the BIS, to and increasing number of Fed presidents themselves, warning that the fun days of bubble inflation are almost over.

These liquidity boosts are not without risks. We note that they risk creating asset bubbles which when they burst can destroy wealth leading to adverse economic outcomes. Asset yields are mean reverting over long periods of time and thus historically low levels of yields in bonds, equities and real estate are unlikely to be sustained forever.

See the original article >>

China’s Copper Imports Slow Due to Probe

By Chuin-Wei Yap

China’s commodity imports in August mostly softened, led by a 12% decline in the volume of copper shipments from a year earlier due to the fallout from a government probe into metal financing at Chinese ports.

Copper imports fell to 340,000 metric tons, according to customs data Monday.

Chinese authorities earlier this year launched investigations into alleged fraud involving aluminum and copper stocks used as collateral for loans in China. Commodity-backed financing has fueled imports of copper in recent years, but this appears to be ebbing due to the investigations.

“Banks became much more cautious” after the probe, said OCBC economist Xie Dongming. “They don’t want to give financing with that sort of collateral anymore.”

There were other factors at play. Local copper processing mills that had shut down for maintenance or due to breakdowns restarted operations in August, adding to local supply and reducing the demand for imports. These included Jinchuan Group’s 400,000-ton Gansu province smelter and Dongying Fangyuan Co.’s in Shandong province.

Still, copper import volumes were largely unchanged in August from the previous month. Demand will likely be underpinned in the second half of 2014 by China’s spending on its power grid, a top demand source for copper, according to Barclays Research.

In the longer run, tight supply globally could lend support for copper prices despite China’s anemic demand, analysts said. Barclays pointed to supply disruptions in Indonesia, which has put bans on the export of unprocessed copper.

By comparison, iron ore imports rose 9% on year in August. The relatively high levels of purchases were likely due to the lowest iron ore prices in five years. Ore prices last Friday reached $83.6 a ton, down 38% from the start of this year – a level not seen since August 2009, according to data provider The Steel Index.

Low global iron ore prices put the squeeze on China’s fragmented and small marginal producers, which is likely to sustain China’s demand for foreign ore, Gavekal Dragonomics said. Customs data Monday showed iron ore imports between January and August were up 17% on year.

Soybean imports last month fell from a record-high volume set in July, a widely expected adjustment amid relatively low global soy prices. Shipments totaled a relatively high 6.03 million tons.

See the original article >>

Will The 300 Year Old Uk Survive?

By: Andrew_McKillop

No Longer Certain “No” Will Win
Unsurprisingly to me, the Yes voters in Scotland are getting more affirmative and less secretive about their preference for an independent Scotland. Because its a classic “first past the post” voting system and process, a minority will decide what happens – but few complain about that time-worn electoral process in Britain, except for example the Lib Dems who want proportional voting because it would give them more seats in the Westminster parliament. 

In any case, there is no such thing as a “Maybe” or “Don't know” or “No preference” voting choice available for the Scottish referendum.

Yougov opinion polls now report a tiny majority in favour of a Yes vote. In the remaining days before the referendum wildcards will be more important than ever in deciding the result, but the simple fact that the Yes movement has recovered from a 20% lead of the No movement in previous months shows that we have a “tidal shift” under way. The momentum is there.

The emotional appeal for continued Union among the No vote camp is predictably getting strident. We are told by people who haven't lived for centuries that “The UK we have known for 300 years will be gone”. They certainly didn't know it for 300 years!

Dodgy claims by the No camp are that full independence for Scotland will be even more of an economic disaster for it, than for England, are now everywhere. The most interesting point is the No camp now allows itself to say England will also be worse off. Its previous line of patter was that only Scotland would suffer from its foolish vote for Independence.

Suddenly we hear that Arab potentates and Russian oligarchs will no longer be “parking their funds” in either England or Scotland if they separate. The GB pound will plummet but with a much cheaper English pound the potentates and oligarchs should be happy to buy their London penthouses at 30% off the previous sticker price! What is the problem? Oh yes, the economy, debt and money.

Debt and Money
What happens to the pound also affects and concerns “the debt”, and that concerns both English and Scottish private banks. The extreme liabilities of the “Scottish” banks HBOS and RBS in fact concern two international private banks with a very large number of English shareholders, as well as Scottish, and very large liabilities in its English operations. The excesses of these two “Scottish” banks (like the excesses of “English” banks) in the run-up to the 2008 crisis, and subsequently, are well documented – but are these automatically sovereign national liabilities?

At present they are treated that way, and the SNP's Alex Salmond has sought to reassure all parties that an independent Scotland would keep bailing out the banks in the same way as the previous UK and in particular by the BOE-Bank of England..The BOE's ownership and a possible “share for Scotland” of the BOE following independence is a highly charged question!

However, the BOE has limits to the money printing feats it can get away with, whatever its ownership. Depending on how England reacts, politically, to a majority Yes vote this ultra-critical question may be very rapidly answered. The answer may also be ultra-radical. If England forces the hand of the Scottish there may be “unexpected events” in this domain.

SNP spokespersons have many times “caressed the option”, or merely hinted at an independent BOS-Bank of Scotland going it alone, but none of them ever mentioned Argentina!

Emotional spin in the patter from the No movement claims that the SNP's Salmond has already but implicitly-only said an independent Scotland “would dishonor its 120 billion GBP share of the UK national debt”. This is supposedly about 8.5% of the total for UK national debt but is unrelated to and vastly smaller than the total of all private bank (and finance sector) debt in both countries.

These amounts of “theoretical debt” are so massive it is not worth bandying figures around – perhaps it is 2 or 3 trillion pounds - and it is mendacious to pretend that the numbers bandied around, of “Salmond reneging on 120 billion” are anything like the real world of private bank (and finance sector) liabilities hanging on the knife edge of “constantly rising” stock exchange values. Neither Scotland nor England could pay these debts in a “worst case scenario” financial market crash as in 2008-2009.

The Wee Haggis and the Oil Derrick
We should not forget the whisky still, either, to print on the new banknotes of the new BOS central bank which has to go it alone due to English petulance and jealousy. Plenty of No vote hard liners are saying that independent Scotland will have absolutely no right to use the pound sterling – named for a city in Scotland! It will have to go it alone. It will be a disaster for Scotland, somewhat like Argentina but it was all the fault of the Silly Scots.

The subject of British-sector North Sea oil of which Scotland controls about 90% of the declining British production is another intensely-worked theme of the Yes and No camps. The No camp has however been less than forthright in simply admitting that for FX-foreign exchange speculators and traders, having oil behind your money is good, and not having it is bad – for England. The traders aren't very bright on the details and in some ways couldn't care less if your oil production is declining and is high-cost. They need to speculate every day and they know you have oil! Whisky revenues and taxation have been somewhat neglected, but are considerable.

By a rather predictable but extreme piece of hypocrisy, outgoing EC chief Manuel Barrosao, whose Commission has endlessly pleaded with oil-rich Norway to join the Union, has curtly said Scotland would not be welcome in the Eurozone or be able to use the euro. This in fact is nonsense. An independent Scotland could use either or both the euro and US dollar. “Dollarized” economies are in no way a rare or threatened species, and plenty of them have no formal relations with the US Treasury Dept to operate and use the dollar in their economies. Plenty of east European EU states which are not members of the Eurozone such as Hungary, Bulgaria, Romania have “euro-ized” their economies without incurring the wrath of the ECB in Frankfurt..

It is sure and certain the SNP wants “Sterlingization” or the continuation of using the GB pound, but if push comes to shove, they have other options. On several grounds, Dollarization may be the better of the “quick and dirty” options but an all-new, all-Scottish money cannot be ignored as a major and serious option enabling Scotland to negotiate with England from a position of strength over bank debt and national debt..These in fact are the key issues – the degree of “sovereignty” attaching to the liabilities of what are international private banks which, when they regularly get into the messes they create themselves, suddenly proclaim their “national identity”.

See the original article >>

British Pound Collapses To 10-Month Lows

by Tyler Durden

We warned here that the "Yes" vote for Scottish Independence was a "high risk" event, and as we noted earlier, with polls indicating its a high probability and 'English' leadership in full panic mode, it is perhaps not surprising that the British Pound opened down 160pips at 10-month lows... (a 500 pip drop in 3 days)... But, didn't the clever people on TV tell us 'it was priced in'?

Chart: Bloomberg

As we concluded previously,

Some Possible Implications Of a “Yes” Vote

In our view, a “yes” vote would have several key implications:

Bad for UK growth. Uncertainties over the economic prospects, policies and currency arrangements of an independent Scotland probably would hit growth in both Scotland and the rest of the UK (rUK), raising the incentive for firms to “wait and see” or to expand elsewhere. Exports to Scotland account for roughly 4% of GDP for the rUK and Scotland would immediately be the rUK’s second biggest trading partner, slightly behind the US and slightly above Germany. Moreover, many banks and businesses have sizeable cross-border exposures between Scotland and rUK, and some firms may seek to limit such exposure as a hedge against the possible breakup of sterlingisation (if that is the policy adopted).

Bad for mainstream UK political parties, good for the anti-EU vote. Once independence happens, Scottish MPs would no longer attend or vote at the Westminster parliament. This would disproportionately hurt both Labour and the Lib Dems: Scotland accounts for 9% of seats at the Westminster parliament (59 out of 650 seats in 2010), but accounts for 16% of Labour seats, and 19% of Lib Dem seats. Conversely, only one out of the 306 Conservative MPs elected in 2010 is from a Scottish seat. However, although the maths of a postindependence Parliament would favour the Conservatives, we believe a “yes” vote would also badly hurt the personal position of PM Cameron, by making him the PM “who lost the UK”. The key winner in UK political terms would probably be UKIP: this reflects the damage to the three main Westminster parties, the evidence that voters are prepared to reject the establishment and vote for radical change, and also the extent to which the themes in the Scottish referendum debate — a choice between membership of a larger bloc or independence — are likely to have echoes in any future EU referendum. A secondary winner might be London Mayor Boris Johnson, who seems to be positioning himself as the radical outsider as candidate to succeed Cameron as Conservative party leader.

Uncertainties are likely to drag on for a while. The Scottish government has said that in the event of a “yes” vote, it would aim to complete negotiations quickly and for Scotland to become independent in March 201611, ahead of the Scottish parliament elections scheduled for May 2016. In practice, the process might well take longer, especially given the interruption of the UK general election in May 2015 and possibility that the election might change the UK government. Indeed, given that Labour has now moved slightly ahead of the SNP in voting intentions for the Scottish parliament in recent YouGov polls, one can imagine scenarios under which negotiations on Scottish independence have to be completed after May 2016 under a Labour-led Scottish government (which opposed independence), a Labour-led rUK government and with a Johnson-led Conservative party in opposition that is moving towards advocating EU exit.

BoE on the alert: BoE Governor Carney noted in his Inflation Report press conference that the BoE would be ready to act if Scotland-related uncertainties escalate: “we also have responsibilities, as you know, for financial stability in the United Kingdom and we will continue to discharge those responsibilities until they change... Uncertainty about the currency arrangements could raise financial stability issues. We will, as you would expect us to have contingency plans for various possibilities”.

*  *  *

With a “no” vote, the UK would still face rising political uncertainties. The UK political landscape is in a state of extreme flux, with the enduring Scottish independence movement, the rise of UKIP as a political force and resultant change in UK party political dynamics, the moderate-to-high probability of a change of government in the 2015 elections and uncertainties over post-election fiscal policy, plus the non-negligible risk of a referendum on UK exit from the EU in 2017-18 or so. Even if the “no” camp prevails in September, we do not foresee a return to the pre-referendum political status quo in the UK. In our view, the outlook for UK political risks will remain elevated well beyond the referendum, and we suspect these UK political risks are underpriced in markets.

More broadly, "Referendum Risk" is one of the more powerful manifestations of what we have termed Vox Populi risk, the Crimea being a particularly powerful, if extreme, example. In particular, what happens in Scotland will be particularly closely watched in Spain, which is facing a referendum on Catalan independence. Latent independence movements elsewhere, such as Belgium, could also be influenced by the outcome in Scotland. We regard the revival of local/national concerns, from Scotland to Spain and beyond, as part of continuing anti-establishment sentiment and a backlash against globalisation. And the UK experience (with growing support for UKIP alongside faster economic growth) raises the issue that economic recovery alone may not be enough to reverse the rise in anti-elite, anti-establishment sentiment.

See the original article >>