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Latest British political drama proves ‘sideshow’ for investors

The pound has barely budged on the resignations of two of Prime Minister Boris Johnson’s key ministers, while a rally in UK stocks on Wednesday is in line with a European rebound.
Image: Neil Hall/EPA/Bloomberg

Britain’s latest political turmoil is adding to an increasingly uncertain UK outlook, leaving investors holding back from big bets on the country’s markets for now.

The pound has barely budged on the resignations of two of Prime Minister Boris Johnson’s key ministers, while a rally in UK stocks on Wednesday is in line with a European rebound. That’s in contrast to years of politically-fueled market turbulence during Brexit negotiations as well as earlier departures in Johnson’s reign.

Global risk sentiment and Bank of England policy remain the key drivers, depressing the currency to trade around its lowest since March 2020. Still, any policy changes from Johnson’s new appointments, such as tax cuts — or a new administration altogether if he is forced out — could quickly have market implications.

Here’s what strategists are saying:

Valentin Marinov, head of G-10 currency research at Credit Agricole, notes Britain’s new Chancellor Nadhim Zahawi’s first public comments since his appointment as pointing to more fiscal stimulus:

“The first comments from the new Chancellor of the Exchequer Zahawi stress the importance of providing further fiscal stimulus from here and the fact that the measures could go well beyond and above what the previous Chancellor has envisaged,” he said. “To the extent that this further allows the BOE to frontload some of the hikes they have in store for us, this could help the pound consolidate.”

Jordan Rochester, currency strategist at Nomura, says it’s only a matter of time before Johnson departs:

“Does it matter for the pound? In the short term no, but in the next few weeks possibly yes,” he says. “The new leader will want to win over voters and the Tory party, so perhaps down the line we see fiscal subsidies for energy and tax cuts to win over the Tory faithful (VAT cuts, income tax cuts etc.). But first you need an actual winner of a leadership contest — this can take roughly up to six to eight weeks.”

Gabriele Foa, co-portfolio manager at Algebris Investments, said in a note that key resignations will lead to more pound volatility: 

“After last month’s confidence vote, Johnson’s position is clearly more unstable and increased uncertainty around the next government will weigh on the currency. Beyond the initial impact, markets may see a change in government as a positive catalyst for GBP. Brexit uncertainty, oscillating economic policies and more politicized Bank of England communication have been important factors behind sterling’s weakness over the last 12 months. Improvement in any of these areas could provide relief for the currency and UK assets in general.”

Deutsche Bank analysts led by Jim Reid note it is difficult to trade any potential policy chances given how fraught Johnson’s position is:

“If the PM can stay on he will likely pivot towards easier fiscal policy now the Chancellor has resigned. However it’s tough to price that in as it’s not clear whether the PM can survive this episode.”

Alvin T. Tan, currency strategist at Royal Bank of Canada, says Johnson’s departure could add to sterling negatives:

“The impact on sterling from Prime Minister Johnson’s political troubles in recent months has been relatively limited. But the resignations of two key ministers yesterday have sharply increased the probability that he will leave office this year according to UK bookmakers. This potentially adds a negative political factor to the existing negative policy and macro factors that have been weighing on sterling.”

Gordon Shannon, a portfolio manager at TwentyFour Asset Management:

“Boris is a side-show versus the underlying drivers of the volatility we’re seeing at the moment, inflation and recession fears,” he said. “Credit is much more at the mercy of the Bank of England, who in turn are at the mercy of inflation prints and whether Russia cuts the pipeline.”

Paul O’Connor, head of UK-based multi asset team at Janus Henderson:

“The new Chancellor is not going to be in a position to substantially alter the course of the UK economy. This probably explains why sterling and other UK assets have barely moved on the news of these resignations and appointments. The best he can hope for is to help steady the ship, until the global economic storm has passed. Some targeted fiscal measures seem more likely than an attempt at introducing a transformative new policy regime.”

Hugh Gimber, J.P. Morgan Asset Management global market strategist for EMEA, in a Bloomberg TV interview:

“I think the pound is most vulnerable in this scenario, because the fundamental backdrop for GBP was already weak ahead of yesterday’s news. Arguably I think the UK has one of the worst mixes of growth and inflation across developed markets today. We’ve seen demand already weakening and inflation importantly is going to peak much later in the UK than in the US or euro zone.”

David Parkinson, sterling rates product manager at RBC Capital Markets:

“On the face of it, fiscal policy looks likely to be looser should Boris survive than it would be under his most-touted successors in the event of a change of leadership; all things being equal that suggests the gilt market may respond more positively to the latter scenario.”

Ipek Ozkardeskaya, senior analyst at Swissquote, says sentiment is mixed and that’s keeping the stock market pricing impact limited:

“When it comes to BoJo, political instability is never good news, and losing the Chancellor of the Exchequer sounds terrible, but the market reaction is limited to the political news either because investors have bigger concerns than the British political drama, or they think that Johnson’s eventual fall — if it happens one day — can’t get the situation worse, on the contrary, maybe, even better.”

Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital:

“Most boringly, the resignation of Rishi Sunak has no implications for markets at all, in my view. It will become more interesting once we have a new prime minister and a new cabinet to see whether it will be more fiscally conservative or not.”

Roger Jones, head of equities at London & Capital:

“I don’t think it has a big implication for UK asset markets as the political outcomes that are likely to arrive do not represent dramatic change to the economic or political agenda as all parties and policies have moved towards centre ground. Labour have also stated they will stick with Brexit and neither Labour or the Conservatives support a Scottish independence vote.”

James Athey, investment director at abrdn, says as a general rule markets don’t like political uncertainty but it’s difficult to see an obvious market move in response to the crumbling of the Cabinet:

“Right now uncertainty is a currency we are dealing with in spades. When economic uncertainty is as elevated as this there doesn’t seem to be much additional risk premium required to account for what is really an extension of a fairly long running trend now — the steady collapse of Boris Johnson’s political capital…within the Tory party the lack of viable leadership alternatives has, I am sure, kept many of the knives in their sheathes. Therefore Boris can probably continue to limp on and markets can continue to focus on growth and inflation.”

© 2022 Bloomberg

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Boris – what a haircut, what a chop!

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