UPDATE 3-UK markets welcome Scotland's rejection of independence


(Reuters) - Investors in British financial markets breathed a sigh of relief on Friday, after a Scottish vote against independence spared them prolonged and unprecedented uncertainty that a break up of the United Kingdom might have unleashed.

Stocks rose, sterling hit a two-year high against the euro, and currency market volatility - which had reached historically high levels ahead of Thursday's vote - collapsed.

Royal Bank of Scotland said it had scrapped contingency plans to relocate to England. Shares in RBS and other financial firms, particularly those domiciled in Scotland, led the stock market rally.

Scotland's rejection of independence ended a fraught few weeks for markets that had seen the value of sterling fall sharply after some polls suggested the 307-year old union was on the brink of collapse.


The vote not only keeps Britain intact but also reduces the likelihood of its leaving the European Union, potentially a much greater risk for markets and something Scottish independence might well have precipitated, analysts said.

"The removal of the risk of a UK break-up is positive for UK assets," said Goldman Sachs.

The FTSE 100 index of leading shares rose 0.6 percent. RBS was up 3 percent, Lloyds was up 2 percent and insurance giant Standard Life was up 1 percent.

Shares of firms with significant exposure to the North Sea oil industry also outperformed the broader market. Glasgow-based oil and gas services firm Weir Group North Sea rig operator Petrofac rose 1.5 percent. [ID: nL6N0RK15B]

Oil giant Royal Dutch Shell said the rejection of independence "reduces the operating uncertainty for businesses based in Scotland."


Some of the most dramatic market moves were in the foreign exchanges, particularly in options, which are used by traders and investors to protect themselves against sharp swings in exchange rates. Volatility had risen before Thursday's referendum to levels not seen since the collapse of Lehman Brothers in 2008 and the unusually uncertain UK general election of 2010.

The cost of insuring against sterling volatility over the next week more than halved to 5.4 percent from a close on Thursday of 11.8 percent and overnight volatility plunged to 9 percent from 23 percent.

Sterling itself strengthened, recovering ground lost since the start of the month after one poll put the "Yes" campaign for independence in the lead for the first time in over a year.

The pound rose to a two-year high against the euro, with the single currency trading as low as 78.10 pence, and rose above $1.65 against the dollar.

But those gains had already started to evaporate by mid-morning on Friday and the pound fell back below $1.64. Major political risks, from the fallout of this vote to next May's general election, still lie ahead for the pound, analysts said.

"Even though the victory of the "No" campaign has avoided a huge political upheaval in the UK, winds of change will still be felt which implies that politics are more likely to be responsible for further bouts of volatility in UK markets over the next few years," said Jane Foley, senior currency strategist at Rabobank.

Market-based UK interest rates rose, as investors bet there will now be less impediment to the Bank of England's raising rates as planned, perhaps as early as next year.

The yield on 2-year gilts rose to its highest in over two months at 0.926 percent and the yield on 10-year gilts rose to a six-week high of 2.603 percent before falling back.

"While there are lots of political questions to be answered, in terms of extra devolution, the economic questions will gravitate back to monetary policy," said RBC economist Sam Hill.