UPDATE 2-UK markets bounce after Scotland rejects independence

2014-10-13

(Reuters) - Investors in British financial assets breathed a sigh of relief on Friday, after a Scottish vote against independence spared them prolonged and unprecedented uncertainty.

Stocks were called to open up by more than 1 percent, sterling rose to a two-year high against the euro, and currency market volatility - which had reached historically high levels ahead of Thursday's vote - quickly subsided.

Shares in companies based in Scotland, such as Royal Bank of Scotland and Lloyds, were expected to rise as much as 3 percent.

Scotland's vote against independence ended a fraught two 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 bounce for sterling was less pronounced than some analysts had forecast, though. The currency fell back after its initial gains to trade just 0.3 percent higher against the dollar.

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 'no' vote removes the huge political and economic uncertainty of untangling the 307-year-old union. A large downside risk to UK growth has lifted," HSBC strategists said in a note on Friday.

London blue-chip stock futures and spread-better calls pointed to a 1.2 percent rise when markets open later on Friday.

The cost of insuring against big swings in sterling over the next week more than halved to 5.675 percent from a close on Thursday of 11.8 percent. Volatility had risen to levels not seen since the collapse of Lehman Brothers in 2008 and the unusually uncertain UK general election of 2010.

Sterling itself, already pushed up on Thursday by speculation that Alex Salmond's nationalists had fallen short of the majority needed for independence, rose to a two-year high against the euro, with the single currency trading as low as 78.10 pence.

It came off its peak against the dollar above $1.65, but was still up a third of one percent on the day at $1.6460.

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 and 10-year gilts rose in early trade by around 2 basis points to 0.90 percent and 2.61 percent respectively .

"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.