Geopolitics seems to have lost its power to shock investors. Intense Israeli bombing of Gaza City is business as usual for markets, the division of Ukraine and sanctions on Russia were merely little local difficulties, while the collapse of Iraq caused barely a ripple in oil prices. Needless to say, the military coup in Thailand passed without notice.
Perhaps it should be no surprise that fighting in far away places has little effect on major money managers, at least as long as it remains contained. But their willingness to ignore completely the possibility of the break-up of the world’s sixth-largest economy suggests complacency.
True, the polling shows Scots will probably vote to stay in the UK in September. There is no fear of some gilts becoming kilt-edged and then being repudiated, as the UK has already said it will continue to guarantee all existing debt. It is also hard to assess the effect of 5m Scots – and the vast bulk of Britain’s oil reserves – leaving the union.
But it is impossible to think bond and foreign exchange markets would not react badly to the uncertainty a vote for independence would create about everything from European Union membership to use of the pound and tax revenues supporting gilts.
Yet, it is hard to detect any tartan discount in bonds or sterling. The pound, even after falling a little yesterday, is still above $1.70, and has been behaving exactly as traders expect for the past year, moving in line with the extra interest they receive on short-dated gilts. It has soared from below $1.40 a year ago as the booming economy supported speculators struggling to find ideas anywhere else.
Credit default swaps do not function well after European interference in the market but still show extraordinarily little fear. CDS spreads are lower than any time since just before Lehman failed, with Britain ranked as the world’s fourth-safest country, behind Sweden, Norway and the US. Investors must hope they are not sent homeward tae think again.
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