Following the news this morning that Boris Johnson has resigned as Conservative Party Leader, and his corresponding public statement given from outside No 10 Downing Street at lunchtime, the financial services industry has reacted to the news that Johnson will thereby step down as Prime Minister. Johnson is set to remain in post until a new Tory Party leader is appointed as a result of the leadership race for which much speculation is already underway.
Mike Owens, Global Sales Trader at Saxo Markets, said: “We’ve seen GBP pop about 0.5% higher on news that Boris Johnson has decided to resign as prime minister. Although predominately driven by the strong dollar, another less significant factor pushing the pound lower over recent weeks has been the political uncertainty, so I think we can expect to see some relief being priced into the UK currency as more details of Johnson’s plan to step down are announced.
“Financial markets prefer certainty, and this situation is no different. We also see the FTSE 250 hitting the highs of the session, although it’s a strong morning for European equities in general and difficult to attribute much of the move to the political headlines.”
Chris Beauchamp, Chief Market Analyst at IG Group: “The pound has been looking for any excuse to bounce against the dollar following its drubbing lately. Boris’ decision to go removes at least some of the uncertainty, and means that a snap election is off the cards. Longer-term the outlook is still bleak for the pound, so this bounce is unlikely to last.”
James Bentley, Director of Financial Markets Online: “The rise in the value of the Pound is a back-handed compliment for the regime that will take the place of the Johnson Government. Confidence has deserted the PM and the market is implying that what comes next can only be better. Sterling began to rise as soon as the Prime Minister indicated he would finally leave office but, as is so often the case, a little initial euphoria could give way to the more mundane, cold, hard realities of the current economic malaise, which could let a little air out of the balloon.
“One such scenario would be if he’s allowed to cling on in the interim until the Conservative Party conference. His critics would say he’s done enough damage already and there won’t be a person alive who thinks he retains that kind of ‘good leaver’ status. The benefit of the doubt resigned long ago, even if he didn’t.”
Tim Graf, Head of EMEA Macro Strategy, State Street, comments on Boris Johnson’s resignation as PM: “Boris Johnson’s resignation does little to change the macroeconomic reality for the UK or the market reality for the pound, where the toxic mix of rising household costs, particularly domestic energy costs, and slowing growth look likely to test any future leader.
“Sterling could be better supported in the coming days with the removal of near-term political uncertainty, but I would see rallies as opportunities to sell given the prevailing economic malaise. Slowing growth should also be a pretext for the Bank of England to slow plans to raise interest rates, further weighing on the pound. However, UK assets might not fare too badly.
“A less proactive MPC could leave gilts more attractive as a consequence. And UK equities, particularly large-cap multinationals, should be able to continue their better relative performance given we expect the weakness of sterling to extend.”
Neil Birrell, Chief Investment Officer, Premier Miton Investors: “Turmoil at the very top of UK political parties and indeed in 10 Downing Street is becoming a regular occurrence. The current situation regarding the leader of the government will just add further uncertainty to the UK economic outlook; it can only discourage investors, particularly international ones, from committing capital to the UK, either in financial markets or corporately. Indeed, they could withdraw capital on fears of a change of regime. That’s not good news for sterling.
“However, there is so much to contend with; inflation, rising interest rates and slowing growth leading the pack, you could argue “what difference does this make”? Good question, but uncertainty abounds and more of it is bad. It is unlikely in the short term that the economy will be impacted much at all; the trend is set for now. But there are potential long term ramifications and markets will reflect those, for good or for bad, as the situation plays out. However, valuations are low and discounting quite a lot already.”
Laura Foll, UK Equities Portfolio Manager at Janus Henderson Investors: “Political uncertainty tends to be reflected most immediately in Sterling, which has seen a modest depreciation since the start of the week. Over a longer term basis Sterling continues to trade at a significantly lower level than it did prior to the Brexit vote in 2016, so any further weakening exacerbates pre-existing trends – for example increasing the price of imported goods therefore putting further upward pressure on inflation (which is unhelpful given current inflation levels).
“The level of Sterling also impacts different areas of the UK equity market differently – companies with substantial overseas earnings will see a positive translation benefit, while some domestic companies that rely on purchasing inputs in dollars will see further upward input cost pressure.
“Outside of the effect on Sterling, political uncertainty comes at a time when sentiment towards UK equities is already poor – this can be seen reflected in lower UK company valuations in many cases than overseas peers as well as recent weak net flows data for UK equities. The events of this week, while unlikely to mean this overhang on UK equities is resolved in the very short term, could mean that once a new leader is established that the perceived additional political risk associated with UK equities is, to a degree, lifted. It therefore ‘brings to a head’ political uncertainty that has formed part of the overhang on UK equities.
“It is too early to speculate on what the next leader will do with regards policies. They will, however, face the same constraints as the previous leadership, in other words trying to tread a fine line between putting government finances back on a more sustainable pathway and meeting a number of shorter term and longer term pressures to increase spending.”
Giles Coghlan, Chief Analyst, HYCM said: “After another tumultuous few days in British politics and a string of high-profile resignations, news of Boris Johnson’s resignation may spell some good news for FX markets. Although there have been no structural changes to the UK economic backdrop to date, markets have seen the pound strengthen against the euro and the dollar, with gains for UK stocks. This is likely to be based on the assumption that Johnson’s replacement may restore Conservative party unity and provide the economy with a much-needed fiscal uplift.“Now, the markets will be asking the question ‘after Boris, who?’. While Rishi Sunak, Dominic Raab and Penny Mordaunt are front-runners at the moment, a clear replacement remains uncertain. Although a replacement for Boris can be mildly positive for the GBP in the short-term, depending on who it is, the longer-term picture may be different. In terms of significant GBP moves, the main risk for substantial GBP falls would come from the prospect of a General Election. If markets sense that a General Election may be coming, this could send the GBP sharply lower on uncertainty.“In any case, investors will be watching the markets closely in the coming days in the hope that the next PM will provide effective leadership as the economic backdrop remains bleak. Likewise, the Bank of England will factor the current political instability into its decision-making, however it is unlikely to change its tactics to bring inflation under control, given that the current situation is unlikely to lead to a public vote right now.”
Neil Birrell, Chief Investment Officer, Premier Miton Investors: “Turmoil at the very top of UK political parties and indeed in 10 Downing Street is becoming a regular occurrence. The current situation regarding the leader of the government will just add further uncertainty to the UK economic outlook; it can only discourage investors, particularly international ones, from committing capital to the UK, either in financial markets or corporately. Indeed, they could withdraw capital on fears of a change of regime. That’s not good news for sterling.
“However, there is so much to contend with; inflation, rising interest rates and slowing growth leading the pack, you could argue “what difference does this make”? Good question, but uncertainty abounds and more of it is bad. It is unlikely in the short term that the economy will be impacted much at all; the trend is set for now. But there are potential long term ramifications and markets will reflect those, for good or for bad, as the situation plays out. However, valuations are low and discounting quite a lot already.”
More to follow…
