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Analysis

Central bankers to retail punters: who shaped markets in 2020

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In an eventful year for global markets, some individuals (and one company) stand out. Here, the FT’s markets team picks out the notable protagonists, and the key person to watch in 2021.

Jay Powell, Federal Reserve chairman

Jay Powell earned himself the title of the “maestro” of central bankers © AP

When the financial system began to creak at the start of March, the US central bank acted quickly to stave off a much more pronounced crisis.

The Fed slashed policy rates to zero, pledged to buy an unlimited quantity of government debt and announced new lending facilities in rapid succession that forever changed its role in financial markets during periods of stress.

In moving decisively, Mr Powell earned himself the title of the “maestro” of central bankers, according to Nick Maroutsos, head of global bonds at Janus Henderson.

What comes next may prove more challenging. The Fed is facing tough questions about encouraging undue risk-taking and potentially adding fuel to risky asset bubbles. Colby Smith

Christine Lagarde, European Central Bank president

Christine Lagarde’s ill-chosen words poured fuel on a sell-off in bond markets © Thomas Lohnes/Getty

Christine Lagarde found out the hard way in 2020 how sensitive markets are to every utterance by central bankers. When the then new ECB chief said in March that she was not there to “close the spreads” — or prevent big gaps opening between the borrowing costs of the eurozone’s stronger and weaker members — her words poured fuel on a sell-off in the region’s bond markets.

Italy’s bonds dropped sharply, sending yields on their biggest ever one-day surge. Investors began to question whether the promise of Ms Lagarde’s predecessor Mario Draghi to do “whatever it takes” to keep the euro together still held. 

The ECB boss swiftly apologised and spent the rest of the year repairing the damage — with considerable success. Later in March, the central bank launched an €750bn emergency bond-buying effort, which has since been scaled up to €1.85tn. Spreads in the eurozone have collapsed. “It’s been a very steep learning curve, no question about that,” Ms Lagarde told the Financial Times in July. Tommy Stubbington

Angela Merkel, German chancellor

Angela Merkel was one of the driving forces behind the €750bn EU recovery fund © Michael Kappeler/dpa

Angela Merkel emerged in 2020 as an unlikely champion of joint borrowing by eurozone members. As one of the driving forces behind the €750bn EU recovery fund agreed in July, she was breaking with years of resistance to burden sharing between members of the currency bloc.

For investors, the establishment of the fund was a powerful statement of solidarity, which along with the ECB’s stimulus efforts bolstered a recovery in riskier assets after March’s dramatic rout. It also ushered in a remaking of Europe’s bond markets, with the EU itself for the first time set to become one of the region’s largest borrowers. 

The existence of a pan-European safe asset could help bolster the euro’s role as a reserve currency. Ms Merkel’s conversion during the Covid crisis has taken the EU one step closer to fiscal integration. Tommy Stubbington

Masayoshi Son, SoftBank founder

Masayoshi Son’s SoftBank earned itself the title of “Nasdaq whale” © Kiyoshi Ota/Bloomberg

SoftBank’s heavy-handed foray into US equity options in mid-2020 forced investors to see the conglomerate’s role in global markets in a new light.

In early September, the FT revealed that SoftBank had snapped up billions of dollars’ worth of derivatives linked to individual US tech stocks, earning it the title of “Nasdaq whale”.

Under the direction of Mr Son, the conglomerate was buying options on such a large scale that it helped to drive up the entire underlying market, as banks selling the options were forced to buy stocks to hedge themselves, in what was described as a “tail wags the dog feedback loop”. SoftBank shareholders recoiled, and the unpredictable Japanese group later abandoned its bets.

SoftBank is best known for punchy bets on privately held start-ups; investors now keep a closer eye on its activities in public markets. Katie Martin

Bill Ackman, Pershing Square manager

Bill Ackman made a quick $2.6bn in the spring with a bet on a rout in the credit markets © Christopher Goodney/Bloomberg

Hedge fund manager Bill Ackman has attracted plenty of attention in recent years, often for losing money. But in 2020 he scored one of the standout trades of the year, making a quick $2.6bn this spring with a bet on a rout in the credit markets.

Mr Ackman, who had been growing increasingly worried in February about the effects of coronavirus, spent $27m buying credit default swap insurance on tens of billions of dollars of US and European corporate bonds, the first time he had placed bets using CDS since the financial crisis.

As the pandemic began to hammer credit and equity markets, the value of these contracts soared. By the time Mr Ackman made an emotional appearance on CNBC on March 18, around the nadir of the market slump, he had already sold half his position.

In the now-famous interview, Mr Ackman warned that “hell is coming” and that as many as 1m Americans could die if the government did not act, explaining that he had grown super-bearish after waking from a nightmare about the virus’s rapid spread. But in the same interview he also said he was aggressively buying stocks — another bet that was later vindicated — because he expected the Trump administration to tackle the economic fallout from the virus.

Mr Ackman is enjoying a big turnround in his fortunes after four consecutive years of losses that included bad bets on pharmaceuticals group Valeant and a bet against nutritional supplement seller Herbalife. His gain of around 65 per cent this year makes his Pershing Square fund one of the world’s top-performing hedge funds. Laurence Fletcher

Carnival Corporation, cruise operator

Carnival was one of the earliest corporate casualties of the coronavirus crisis. © Kazuhiro Nogi/AFP/Getty

When surging coronavirus cases forced the Diamond Princess cruise ship into quarantine in February, it provided one of the first clear signs that Covid-19 was a problem beyond China’s borders. Carnival Corporation, the vessel’s owner, soon became one of the earliest corporate casualties of the coronavirus crisis.

And yet just two months later, Carnival raised more than $6.5bn in debt and equity, demonstrating just how much the Federal Reserve had underpinned capital markets. A $4bn bond backed by the company’s cruise ships set a template that corporate America soon followed: pledging prized assets to unlock funding.

Carnival encapsulated a year in which companies facing near-complete collapses in revenue could still raise billions of dollars in financing. It was at the forefront of many capital markets trends, from convertible bonds to post-vaccine announcement equity raises. And by November Carnival could once again borrow without pledging its assets, capping off a year in which it raised more than $16bn from debt and equity markets. Robert Smith

Prince Abdulaziz bin Salman, Saudi Arabia energy minister

Prince Abdulaziz bin Salman led Saudi Arabia in launching an all-out price war that hammered the oil market © REUTERS

The role of the Saudi Arabian energy minister is generally pretty straightforward: corral Opec and allies like Russia to assist you in managing oil supplies, keeping prices just high enough without overheating.

But when diplomacy fails, what option do you have to respond?

In March Prince Abdulaziz bin Salman, the half-brother of Crown Prince Mohammed bin Salman, decided to show allies and rivals alike. When Russia baulked at further production cuts in the early stages of the pandemic, Prince Abdulaziz led Saudi Arabia in launching an all-out price war that hammered the oil market even before lockdowns really started to slash oil demand.

Brent crude did not so much fall as implode, losing 24 per cent in just one session and continuing to slide for the next six weeks.

It ultimately took an intervention from US president Donald Trump, fearing for the future of the US oil industry, to get Prince Abdulaziz to change course. In April a deal was agreed for the largest ever production cut. But was Prince Abdulaziz’s price war a sign of things to come? David Sheppard

Berat Albayrak, former Turkey finance minister

Berat Albayrak’s two-year tenure saw Turkey’s lira lose 46 per cent of its value © Mucahid Yapici/AP

Turkey’s lira lost 46 per cent of its value during the two-year watch of Berat Albayrak, who quit as finance minister in November. Much of the blame belongs to his father-in-law, president Recep Tayyip Erdogan, whose obsession with credit-fuelled growth and deep aversion to higher interest rates has for years put strain on the currency. 

But Mr Albayrak, 42, was the driving force behind a disastrous attempt to hold the lira steady. Turkey’s central bank spent tens of billions of dollars on a failed intervention that left a deep hole in the country’s foreign-currency reserves. After Mr Albayrak’s resignation in November, the lira enjoyed its biggest one-day rise in two years. Laura Pitel 

Dave Portnoy, stock market trader

Dave Portnoy embodied a new generation of have-a-go traders © Dave Portnoy/Twitter

Amateur stock traders had a blowout year in 2020, particularly in the US, where bored sports betters branched out into markets in droves. Leading the pack was Dave Portnoy.

With bravado, boisterous humour, a foul mouth and millions of social media followers, Mr Portnoy embodied a new generation of have-a-go traders, noisily and frequently reminding his fans that “stocks only go up”. From the end of March 2020, to the intense frustration of more cautious institutional fund managers, he was right.

Aside from a few niche bets, Mr Portnoy and his acolytes are simply too small a force to move global markets. But this vibrant community has ridden the wave in stocks up to new record highs, and shows no sign of backing down. Katie Martin

Key figure of 2021: Janet Yellen

Janet Yellen will assume the Treasury secretary role at a pivotal moment for the US economy © Andrew Harnik/AP

If confirmed by the Senate as the next Treasury secretary early in 2021, Janet Yellen will become not only the first woman to hold the country’s top economic job but also the first person to have served at the helm of the Treasury, Federal Reserve and the Council of Economic Advisors. 

She will assume the role at a pivotal moment for the US economy. The recovery has begun to stall, the Fed has stretched monetary policy close to its limit and the coronavirus crisis continues to rage on.

One focal point will be the fate of several lending facilities deployed jointly by the Treasury and Fed earlier this year. Outgoing Treasury secretary Steven Mnuchin refused to extend five programmes beyond their December 31 expiration date, despite pleas from investors. Mr Powell has also indicated his support to keep these facilities operational in case the volatility that roiled markets earlier this year returns. 

Investors expect Ms Yellen to work closely with Mr Powell to try to overcome resistance and get these back online in short order. Colby Smith



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Analysis

Covid paralyses Asia as western economies prepare for blast-off

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Throughout 2020, Asia’s success in controlling Covid-19 made it the champion of the world economy. While Europe and the US were mired in deep recessions, much of Asia escaped with a shallower downturn or even kept growing.

But as western economies gear up for a vaccine-induced rebound which is set to take their output back to its pre-pandemic scale by the end of this year, parts of Asia are still paralysed by coronavirus. As a result, although the region’s output is already above its pre-pandemic level, slower growth is expected in the coming months.

As it launched its new regional outlook last week, the Asian Development Bank said that the region’s economies were diverging and that more Covid-19 waves were a big risk.

“New outbreaks continue, in part due to new variants, and many Asian economies face challenges in procuring and administering vaccines,” said Yasuyuki Sawada, the ADB’s chief economist.

The ADB projected growth of 5.6 per cent across developing Asian economies in 2021, led by growth of 8.1 per cent in China and 11 per cent in India. But the continued threat of coronavirus means risks to that outlook are skewed to the downside.

“Six months ago, or eight months ago, I would have said Asia is going to be ahead of the game because Asia can control Covid,” said Steve Cochrane, chief Apac economist at Moody’s Analytics in Singapore.

But the picture has changed, with India suffering a severe wave of the virus, and cases still high in countries such as Indonesia, the Philippines and Thailand. Thailand is unable to reopen its crucial tourist industry.

More subtly, countries such as Japan are only controlling the virus with restrictions that keep parts of the economy in hibernation. “Some countries need vaccines to control Covid,” said Cochrane. “Others need it so they can open up to international travel and tourism.”

The promise of more than 6 per cent growth in the US this year, as a result of President Joe Biden’s fiscal stimulus, would normally have Asian exporters licking their lips.

Line chart of GDP rebased (2019 = 100) showing Asian economies were less affected by the early stages of the pandemic

The outlook, however, is more subdued than record US growth would usually imply: Americans already bought plenty of goods during the pandemic, while higher US interest rates would mean tighter financial conditions in Asia.

“Adding stimulus at this stage, from the goods perspective, is a real test of whether wants are insatiable,” said Freya Beamish, chief Asia economist at Pantheon Macroeconomics. As the economy opens up, US consumers will probably pay for the services they were denied during lockdown — such as meals out and haircuts — rather than replacing their television again.

There will still be some spillover from the US stimulus, said Beamish, noting that service providers needed equipment, too. “We suspect that people will find new goods to buy and that Asia will benefit from that.” But she added: “We suspect that China will benefit proportionately less from the services recovery than from the manufacturing recovery.”

Whether the extra US demand for goods turns out to be large or small, it is clearly positive. By contrast, higher US interest rates and a stronger dollar would threaten many emerging Asian economies with a repeat of the 2013 “taper tantrum”.

Increased financial integration and foreign currency borrowing mean that the pain of rising US interest rates is quickly felt on the other side of the Pacific.

“A stronger dollar is no longer an unalloyed blessing for Asia,” said Frederic Neumann, co-head of Asia economics at HSBC in Hong Kong. “It helps exports but tightens financial conditions.”

However, inflation is subdued across most of emerging Asia, and the ADB said the risk of a US-induced shock to financial conditions “remains manageable at present”. It said economies such as Sri Lanka and Laos would be vulnerable if such a shock occurred.

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Some Asian economies are well-placed for the next few years, especially Taiwan and South Korea, which are exposed to the semiconductor cycle. “Judging from semiconductor shortages, it doesn’t look like the electronics cycle will break down in the next two or three quarters. That tides them over this rough patch,” said Neumann.

But other Asian economies will find themselves in the less familiar position of relying on domestic demand to grow. One of the biggest question marks is China itself, where first quarter numbers suggest the economy has lost a little momentum.

“Chinese domestic demand still has a way to go,” said Cochrane. “Our forecast right now is for 8 per cent growth in China in 2021, but it depends a lot on policymakers and how quickly they pull back on stimulus and introduce frictions in areas like construction.”



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Analysis

Has Venezuela’s economy bottomed out?

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After one of the biggest economic meltdowns in Latin American history, there are signs that Venezuela may finally be turning a corner.

According to some economists, the socialist government’s decisions to loosen currency controls, relax import restrictions and encourage informal dollarisation have breathed a modicum of life into an economy that has shrunk by about 75 per cent since 2013.

The change of government in the White House has also raised hopes that a solution might be found to the country’s long-running political stalemate, which might lead to an easing of US sanctions and in turn fuel a further rebound.

Credit Suisse recently predicted the Venezuelan economy would expand by 4 per cent this year, which would be its first year of growth since 2013. The bank acknowledged this was in part due to the resumption of economic activity after last year’s hit from the coronavirus pandemic, but this was “not the whole story”.

“The revival in domestic demand, which we have long been noting, is becoming more apparent in the data,” Alberto Rojas, the bank’s chief economist for Venezuela, wrote in a note to clients.

“The easing of controls and widespread use of foreign currencies in everyday transactions has rekindled economic activity — even if just slightly.”

Rojas forecasts further growth of 3 per cent in 2022. “In our view, the growth this year is not just a dead cat bounce,” he wrote.

In Caracas, people were sceptical that this amounted to any sort of meaningful recovery. According to the IMF, per capita gross domestic product in Venezuela has dropped a staggering 87 per cent over the past decade, from $12,200 a year in 2011 to $1,540 now. For the first time, the average Venezuelan is poorer than the average Haitian.

“When you’ve fallen so low, eventually you’re bound to see some sort of correction,” said Adán Celis, president of Venezuela’s manufacturers’ association Conindustria. “The government has introduced some anarchic measures of economic flexibility and that’s provided us with a little bit of oxygen but the structural problems remain.”

But a handful of other banks and consultancies also expect output to increase. Two Venezuelan consultancies, AGPV and Dinámica Venezuela, predict growth this year of 1.9 per cent and 2.3 per cent respectively.

UK-based Oxford Economics forecasts growth of 0.2 per cent this year followed by a jump of 13.1 per cent next year, although it stresses this recovery needs to be seen in context.

“This follows two years in a row [2019 and 2020] when GDP fell by a third or more,” said Marcos Casarin, OE’s chief Latin American economist. “Given the magnitude of the collapse seen since 2014, Venezuela could grow at double-digit rates for several years in a row and still not recover its pre-crisis GDP level.”

Column chart of GDP change (%) showing Venezuela's economy has been shrinking for years

For every economist predicting growth, there are plenty who say Venezuela will suffer more pain before things finally improve.

FocusEconomics, a provider of economic consensus forecasts, recently polled 21 banks and consultancies for their views on Venezuela. The consensus was for a fall in GDP of 3.1 per cent this year followed by a rebound of 2.7 per cent next year. The IMF predicts a contraction of 10 per cent this year and 5 per cent next.

The huge differences between forecasts reflect uncertainty over the consequences of the pandemic, the impact and timing of the rollout of Covid-19 vaccines and the future of the sanctions regime.

“The evolution of US sanctions under the Biden administration remains the key determinant of the outlook,” wrote Stephen Vogado, economist at FocusEconomics.

The sanctions prohibit Venezuela from selling oil to the US and make it difficult for it to export elsewhere, although the government has found ways to get round the measures. Venezuela’s oil exports have risen slightly in each of the past five months, hitting a 10-month high in March — although they are still feeble compared with historical highs.

While oil has been the mainstay of the Venezuelan economy for the past century, the country also used to produce cacao, coffee and rice in significant quantities. It boasted a textile industry and produced chemicals, cement, steel and aluminium. Most of those industries have been decimated in the past two decades of revolutionary socialist rule.

At an outlet selling car accessories in a petrol station in the Las Mercedes neighbourhood of Caracas, store manager Alfredo Barrera said informal dollarisation had brought some degree of price stability after years of hyperinflation.

“The economy has adapted to the country’s problems,” he said. “Right now, it’s fair to talk about relative stability in terms of the currency but we’re a long way from seeing real improvement.”

At La Alicantina, a bakery that has been in business for more than 30 years, manager Douglas Palencia said sales had been hit hard by the pandemic. The shop’s windows, usually full of cakes and pastries, were empty. “I don’t have great expectations for this year,” he said.



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Sturgeon taps Scottish resentment over Johnson and Brexit

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Kenny Paton, the postman in Dumbarton, has been criss-crossing the west coast town near Glasgow, delivering flyers for all the parties contesting Scotland’s parliamentary elections this Thursday. But he is only listening to one.

For all the shortcomings of the Scottish National party’s 14 years in power, the recent turmoil surrounding its handling of sexual harassment claims against former leader Alex Salmond and the destructive nature of its cherished goal of breaking the 314 year union, the party is on course for victory once again.

That is in large part because the SNP, with first minister Nicola Sturgeon at its helm, has been speaking to the heart, tapping into the deep resentment many Scottish people feel at being ruled from Westminster by Conservatives whose leader Boris Johnson and policies, notably Brexit, they did not vote for.

Dumbarton, Scotland map

For some Scots, the economic arguments against independence — and these have only grown with the sharp deterioration in Scotland’s fiscal position since Brexit and the onset of the coronavirus pandemic — are no longer cutting through. 

“You can get into all the intricacies about the border and the currency but at the end of the day who do you want to run the country Boris Johnson or Nicola Sturgeon?” said Paton, who once supported Labour, but is now rooting for the SNP.

Nicola Sturgeon campaigns in Dumbarton © Jeff J Mitchell/AFP/Getty Images

If opinion polls in the run-up to Thursday’s vote are correct, the party is sure to remain the largest in the devolved Holyrood parliament and will possibly gain the slender majority it wants to continue pressing Westminster, for its second chance in seven years of winning independence in a referendum.

There is also the probability that with the Scottish Green party, and Salmond’s newly launched Alba party, the SNP will form part of a bigger block in favour of Scotland going its own way.

Chart tracking voting intention polls for the constituency vote in the Scottish Parliament election

But to get across the line to an SNP majority, Sturgeon may need to win marginals such as Dumbarton, where Jackie Baillie, the deputy leader of Scottish Labour and a popular constituency MSP is defending a majority of just 109, the most vulnerable in Scotland.

As well as her appeal to Scottish identity, Sturgeon has a number of other things in her favour. One is Labour’s weakness, and the perception that it could be long before the party Scotland once voted for en masse returns to power.

“I have been an advocate for Scottish independence since the Conservatives won a majority in Westminster. They do not reflect our views — Scotland is a progressive place,” said Ross Crawford, a 28-year-old IT consultant. “It will be a while before Labour can collect themselves — that’s what makes it so discouraging. It means yet more Conservative rule,” he said.

Labour’s Jackie Baillie in Dumbarton © Jeremy Sutton-Hibbert/FT

Most of all Sturgeon has Brexit and the indifference shown by first Theresa May, the former prime minister, and then Johnson to the majority in Scotland who voted to remain in the EU and who wanted to retain close relations.

“In 2019, the polls began consistently showing higher levels of support for the SNP. The rise occurs entirely among Remain voters,” said John Curtice, professor of politics at the University of Strathclyde. “Whatever the preferences of Boris Johnson, and Michael Gove [Cabinet Office minister], the brutal reality is that their pursuit of Brexit has undermined support for the union,” he said. 

Julie Reece: ‘We felt safe with her [Nicola Sturgeon] during Covid’ © Jeremy Sutton-Hibbert/FT

For most of last year backing for independence in Scotland polled at 50 per cent or higher when undecided voters are excluded. But while it has slipped back since then, support for Sturgeon in Dumbarton remains high. This has much to do with her more assured performance during the pandemic, which has helped the SNP avoid an awkward reckoning for its less than stellar longer term record in areas such as education and health. 

“We felt safe with her during Covid,” said Julie Reece, a bus company manager and former Labour supporter now backing the SNP.

Like many people strawpolled in the constituency, Reece was unfazed by Sturgeon’s alleged mishandling of sexual harassment claims against her former ally. “They have tried to make her a scapegoat for Alex Salmond’s affairs,” she said, adding, with a nod to how the first minister has brought women like her behind the SNP cause: “She has engaged women better — it switches you on that bit more,” she said.

But the stakes are high and the tightness of the contest is also galvanising Scots who support the union and are passionately against the rupture it would cause. This has led to unlikely alliances in Dumbarton, with some staunch supporters of the Conservative party even promising to vote tactically for Labour — a rare occurrence in UK politics.

Chart tracking voting intention polls for the regional vote in the Scottish Parliament election

“Anything that keeps the SNP out,” said Carl Vickers, who works at the Faslane naval base further up the Clyde estuary, where thousands of jobs could be lost if Scotland breaks away. The SNP opposes the use of Faslane to store the UK’s nuclear deterrent.

Vickers described himself as a Conservative by nature but said he would be voting for Baillie on the day.

“It’s all about stopping them [the SNP] getting another referendum,” said Trish Collins, a headhunter and Tory who was also planning to vote for the Labour candidate in the constituency vote, which the Conservatives have little chance of winning.

In Scotland, members of the parliament in Edinburgh are elected using a hybrid voting system: constituency representatives elected using the first past the post voting system while additional representatives are elected according to the proportion of votes a party secures in a region comprising several constituencies.

On the banks of the river Leven, Baillie herself remained defiant. “My seat on paper should go to the SNP but I am a seasoned campaigner so I am not stopping until polls are closed,” she said.

A pro-Scottish independence rally in Glasgow last Saturday © Jeremy Sutton-Hibbert/FT

“Our number one priority should be recovery and then we can argue about the constitution,” she added, warning that when Westminster pulls the plug on the job protection scheme, there could be a surge in unemployment.

“Brexit has been a mess,” said Baillie. “Leaving the UK could be 10 times worse.” 

That need to focus on recovering from the pandemic — the core of Labour’s campaign — does appear to have resonance, even among some SNP supporters. But for those already convinced about the risks involved in breaking up the UK union, the feelings were even more emphatic.

“We’d just got over one independence vote then Brexit was thrown at us. Now the SNP have got a good chance of coming out with a majority — the whole of Scottish politics is a joke,” said Bryan Burn, a wholesaler for fishing tackle.

He was speaking an hour south by car from Dumbarton in the relatively prosperous town of Ayr, where Conservative MSP and former farmer John Scott is defending another slender majority. A life-long Labour supporter, Burn was visibly distressed at the way things are headed. “If I were younger I would be looking to move elsewhere,” he said.

But Sturgeon is picking up votes in Ayr too.

“I like what she stands for. She’s great at what she does,” said Chris Hughes, a self-employed software engineer, who hoped an independent Scotland could rejoin Europe, and who along with his wife was voting SNP.

Scott, the Conservative incumbent who is defending a majority of just 700 votes, acknowledged that the odds were even. “It will be very, very close,” he said. “The independence issue has become an issue of the heart. Many people don’t take into account the grim realities it might hold for Scotland.”



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