The pound is trading lower across the board this morning after reports surfaced that the triggering of Article 50 could provide the catalyst for a second Scottish independence referendum. This fall has helped the FTSE 100 make a bright start to the week with the index higher by a little over ten points despite some notable declines amongst its components.
Sturgeon to call for a second referendum?
According to senior government sources the Scottish National Party (SNP) leader Nicola Sturgeon will look to take advantage of Theresa May beginning the formal process of Brexit next month by demanding another referendum on Scottish independence. Whilst polls suggest that the majority of Scots would vote in favour of staying in the UK the UK government may consider this too big a risk to take and do maintain the right to refuse another referendum. If Scotland were to choose to leave the UK then the prospect of a devolutionary crisis could rise, which in turn may significantly weaken the UK’s bargaining power when negotiating Brexit terms with the EU. Whilst the pound is lower on this story, the size of the selling remains fairly small and this seems more a case of a story that could grow into something bigger in the coming weeks rather than a major market mover at present.
Insurers plummet as government cuts discount rate
Whilst the UK leading stock benchmark is higher in London this morning there has been some substantial drops in the price of certain shares, with Direct Line lower by more than 7% after the government announced a change to a key discount rate. The current discount rate of 2.5% is expected to be reduced to -0.75% in a move that Direct Line have said would cut up to £230m from their annual profits. The discount rate which is based on real yields on index-linked gilts has been at the present level since 2001 and is in essence simply the amount by which insurance companies can discount their liabilities. Whilst many in the industry expected a cut but the consensus had been for a move not below 1%, so this latest development has caught many off guard. Shares in Admiral Group (LON:ADML) are also lower on the news, although the 3% decline is less than half that at Direct Line as Admiral have estimated the adverse impact to total between £70 and £100m. Consultants PwC have estimated that annual motor premiums would rise by 50-75 pounds on average in light of this news.
LSE merger on the rocks
Also under pressure this morning is London Stock Exchange Group (LON:LSE) with shares in the firm lower by more than 3% after the proposed merger with Deutsche Boerse (DE:DB1Gn) looks unlikely to now proceed. The controversial £21bn merger which has looked like it would go through for almost a year now has been thrown into chaos due to a dispute with the European Commission over LSE’s majority stake in an Italian bond trading platform. Despite these shares falling the index overall remains higher with Mining giants Anglo American (LON:AAL), and BHP Billiton (LON:BLT) as well as oil majors BP (LON:BP) and Royal Dutch Shell (LON:RDSa) all starting the week on the front foot.