Beyond Bulls & Bears

Fixed Income

Amid Brexit Stalemate, Could a New Scottish Referendum Be on the Cards?

Issues still remain unresolved between the United Kingdom and the European Union, with continued posturing on both sides. David Zahn, our Head of European Fixed Income, weighs in on the latest developments, and ponders whether we could see some disharmony within the United Kingdom—potentially leading to another Scottish referendum.

This post is also available in: Chinese (Simplified) French Italian German Spanish

The United Kingdom’s self-imposed October 15 Brexit deal deadline has passed, and with no trade agreement between the European Union (EU) and the United Kingdom, World Trade Organization rules would seemingly come into play. Despite some tough rhetoric on both sides over the past couple of weeks, the negotiations aren’t dead yet. Getting an agreed-upon deal is dependent on a lot of nuances—fishing rights in UK waters remain a big sticking point—but the EU seems to be softening its stance a bit.

Now there is a new deadline of mid-November for a deal, but we would not be surprised to see it pushed out further into year-end. We think the odds that a deal will be reached are currently around 50-50, and it could even be midnight on 31 December until we know the answer. We’ve seen sterling rally and gilt yields rise in reaction to the news that a deal might be forthcoming, but there are still a lot of sticking points to get through. And lest we forget, once the deal is agreed, it has to make its way through 27 European parliaments and the UK parliament to obtain approval.

At the moment, the United Kingdom seems to be showing signs of willingness to walk away with no deal. We think that would have real ramifications for the financial markets; UK gilts would likely rally and sterling would likely sell off. And conversely, if a deal is agreed and everybody thinks it’s a reasonable deal, we will likely see the reverse dynamic.

The COVID-19 Divide

COVID-19 has brought an interesting dynamic into play within the United Kingdom itself—a fractionalisation amongst the devolved nations. England, Wales, Scotland and Northern Ireland are following different rules or protocols in regard to the virus and lockdowns; there isn’t a unified response or agreement.  The size of this split may be finalised depending on which COVID-19 protocols seems to be the most successful.

The idea of the United Kingdom as a homogeneous group seems to be weakening, which could be an issue going forwards. We would not be shocked to see another Scottish referendum on independence from the United Kingdom in the coming years, and it seems like the stage is being set with the Scottish National Party increasing their rhetoric in favour of a new referendum. We will be following developments closely, but the COVID-19 response may embed itself into politics well after it is no longer top priority.


Important Legal Information

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as of publication date (or specific date in some cases) and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market.

Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own professional adviser or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Issued in the U.S. by Franklin Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236,—Franklin Templeton Distributors, Inc. is the principal distributor of Franklin Templeton Investments’ U.S. registered products, which are not FDIC insured; may lose value; and are not bank guaranteed and are available only in jurisdictions where an offer or solicitation of such products is permitted under applicable laws and regulation.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

What Are the Risks?

All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments.

Get Content Alerts in My Inbox

Receive email alerts when a new blog is posted.