Scotland Independence - Europe Holds Its Breath

By: Christopher_Quigley

This Thursday the 18^th September Scotland goes to the polls to decide whether it wants to stay in a Union with the rest of Great Britian 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 through-out Europe. Such a result, many believe, will feed the secession fevour spreading across Euroland and lead to continued Euro weakness.

Recently Gorge Soros penned an Op-Ed piece in the FT, (Financial Times September 10^th 2014), voicing his horror at 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:

“This is the worst possible time for Britain to consider leaving the EU – or for Scotland to break with Britain.

The EU 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 US, 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 centre, Britain ought to be centrally involved in crafting a European response to this threat. But like the US and the EU 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 UK membership in the EU 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 UK 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 immanent poll has resulted in grave instability entering into the Sterling area.  Investors pulled $27 billion out of UK 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 UK 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).

Daily Chart: Royal Bank of Scotland(RBS): 16^th. Sept.

Daily Chart: Lloyds Banking Group(LYG): 16^th. Sept.

Technical Uncertainty  Enters The Market.

The market following a strong recovery since early August is 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.

Daily Chart: % 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 McClennan Summation Index below which technically indicates a continued downward trend in current price action.

Daily Chart: McClennan 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.

By Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web   sites based in California, New York, London and Dublin.

Mr. Quigley is now lives in Dublin, Ireland and Tampa Bay, Florida.

© 2014 Copyright Christopher M. Quigley - All Rights Reserved

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