This Thursday, the 18th of September, Scotland goes to the polls to decide whether it wants to stay in a Union with the rest of Great Britain or go down the road of independence. At the moment the election is too close to call with sentiment equally divided between either camp. If the Scottish people do opt for going it alone it will send shock waves throughout Europe. Such a result, many believe, will feed the secession fever spreading across Euroland and lead to continued Euro weakness.
Recently, Gorge Soros penned an Op-Ed piece in the FT voicing his horror at what was occurring. In the main he outlined that the break-up of the British Union could lead to the destabilization of the European Union as a whole just when it needs to be to be strong and united to deal with Russian aggression (emphasis added):
“This is the worst possible time for Britain to consider leaving the EU — or for Scotland to break with Britain.
The E.U. is an unfinished project of European states that have sacrificed part of their sovereignty to form an ever-closer union based on shared values and ideals. Those shared values are under attack on multiple fronts. Russia’s undeclared war against Ukraine is perhaps the most immediate example but it is by no means the only one. Resurgent nationalism and illiberal democracy are on the rise within Europe, at its borders and around the globe.
Since world war two the European powers, along with the U.S., have been the main supporters of the prevailing international order. Yet, in recent years, overwhelmed by the euro crisis, Europe has turned inward, diminishing its ability to play a forceful role in international affairs…
As a major power and global financial center, Britain ought to be centrally involved in crafting a European response to this threat. But like the U.S. and the E.U. itself, Britain has also been distracted by internal matters. Conservative Prime Minister David Cameron has been persuaded by anti-European zeal — not least within his own party — to put U.K. membership in the E.U. to a vote in 2017. A poll on Scottish independence is only days away. Just when Britain should be confronting grave threats to its way of life, it is preoccupied with divorce of one type or another.
Divorce is always messy. A vote for Scottish independence would weaken — in political and economic terms — both a truncated U.K. and Scotland An independent Scotland would be financially unstable, especially if threats to renege on debt repayments were carried through.”
The uncertainty caused by the imminent poll has resulted in grave instability entering into the Sterling area. Investors pulled $27 billion out of U.K. financial assets last month alone - the biggest capital outflow since the Lehman crisis in 2008. Morgan Stanley said daily equity flow data pointed to some of the largest U.K. equity selling on record.
Many believe that if the poll on Thursday results in a yes vote there will be a major run on Sterling and Scottish equities, in particular Royal Bank of Scotland (RBS) and Lloyds Banking Group (which owns RBS).
Royal Bank of Scotland(RBS): 16th. Sept.
Lloyds Banking Group(LYG): 16th. Sept.
Technical Uncertainty Enters the Market
Following a strong recovery since early August the market is finally showing signs of technical uncertainty, but nothing to be too concerned about at the moment. When we compare the Dow Transports with the Dow Industrials on the three day chart below we observe that there is a slight divergence developing. The Transports (yellow line), following a positive jump, are beginning to trend slightly down, while the Industrial Index (green line) is trending sideways.
Dow Transport Index V Dow Industrial Index: 3 Day Chart.
However, when we look the percentage of stocks above their 200 Daily Moving Average we see a more pronounced negativity in sentiment.
% of Stocks Above 200 Daily Price Moving Average.
On the above chart we can immediately see that the 100 DMA Line (white) has been broken and became a point of resistance 3 times in the last two months: this is bearish.
This weakness is reiterated on the McClellan Summation Index below, which technically indicates a continued downward trend in current price action.
McClellan Summation Index
Accordingly, I would not be adding to any new equity positions at the moment, as the risk-reward ratio is neutral. However, this situation may change rapidly this Friday as exit poll results filter out from the Scottish referendum.
Charts courtesy of Worden Bros.
© Christopher M. Quigley 16th. September 2014.
