Produced by Alessia Giustiniano. Filmed by Rod Fitzgerald.
When it comes to worst case scenarios, do currency markets have vivid imaginations? The pound lost little more than half a percent of value against the dollar on Tuesday after the leader of the Scottish national party called for a referendum on independence to be held in the middle of Brexit negotiations. At about $1.215, the British currency was close to, but still above, the lowest point touched in last year's collapse. Traders and investors had already pictured Theresa May and Jeremy Corbyn, Britain's prime minister and her opposition counterpart, joining together to campaign for the good of the UK, it seems.
So there may be reason to believe, as many investors seem to, that the worst of plausible outcomes for the UK have already been anticipated by markets, where pessimists are plentiful and active. According to data released by the Commodity Futures Trading Commission, there was an increase in the net size of bets last week against the pound. That was for the fifth week in a row, and the largest such position since November.
Signals from the bond market also suggest an abundance of gloom. Yields for UK government debt remain very low, by pre-Brexit standards, with a 10-year gilt offering 1.24%. Borrowing costs were suppressed by the Bank of England's bond buying programme by perhaps 0.4 to 0.5 percentage points, BNP Paribas has estimated. But they have not rebounded now that the buying has stopped. So there appears to be little complacency induced by the strength of economic indicators. And sterling is undeniably cheap, when judged by traditional metrics. On a purchasing power parity basis, sterling might be worth perhaps 1.3 dollars. A London Big Mac is about 28% cheaper than in New York.
Still, Scotland's response was perhaps predictable. When negotiations do begin, surprises thrown up by a discussion with 27 sovereign nations may be harder for the market to imagine.