The end of Boris Johnson’s run as prime minister may ease the sense of political chaos, but it won’t fix any of issues depressing UK markets.
That’s the view from investors and market strategists, who said they’re still bearish on British assets as Johnson announced he will step down. The market reaction was positive, with the pound approaching $1.20. The FTSE 100 Index gained alongside other global stock indexes.
But traders put little faith in the rally. Sterling is already down 11% this year and is increasingly at the mercy of global risk sentiment. Investors are more preoccupied with the direction of policy at the Bank of England, rather than whoever resides in Downing Street. And even then, Governor Andrew Bailey and his fellow rate setters say they can only do so much in the face of supply disruption and soaring energy costs.
“I don’t believe this resignation will have a big impact on markets,” said Micheal Keusch, a fund manager at Bellevue Asset Management. “It certainly brings incremental uncertainty, but in the grand scheme of things, with all the real big uncertainties around, I don’t think this will be moving the needle much.”
Boris Johnson to Stay on as Caretaker UK Prime Minister: TOPLive
It’s a far cry from when the pound swung on UK political news during the Brexit negotiations. Even in the early months of Johnson’s term, the pound rallied when he replaced his chancellor.
But that was before the pandemic and war in Ukraine engulfed markets. With inflation at its highest in four decades, who replaces Johnson as Conservative leader isn’t going to be enough to change the pound’s course on its own.
Another factor weighing on the pound is that the BOE is expected to move slower than the Federal Reserve in tightening policy. For currency traders, that interest-rate gap makes sterling less appealing.
“There is a cacophony of problems on the next Prime Minister’s plate, not least the cost-of-living crisis causing voters so much financial pain,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Here’s what other market participants had to say:
Neil Jones, head of foreign-exchange sales to financial institutions at Mizuho:
“It appears that a host of headline buy signals bought the pound on the news,” he said. “But my sense is longer-term participants will continue to sell sterling. The pound was a sell prior to the political uncertainty and it should continue to trend lower.”
Valentin Marinov, head of G10 currency research at Credit Agricole:
“FX markets will be hoping that any new leader would strive to restore party unity and allow the Tories to govern more effectively at a time when a cost of living crisis casts a long shadow over the economy,” he said. “Some clients further think that any new government would be under pressure by Tory MPs to deliver ‘tax cuts’ in an attempt to boost growth.”
Fredrik Repton, portfolio manager at Neuberger Berman.
“My working assumption was that there was 1-1.5% risk premium in GBP due to the political situation, but the question now is how much of that can be unwound if Johnson is caretaker until October,” he said.
Pooja Kumra, senior European rates strategist at Toronto Dominion Bank:
“Now key is for the Conservatives to firm up their game to avoid early elections. This could come via increased fiscal spending and reforms in taxes. We expect flatter curves as BOE is more likely to hike quickly in a big fiscal set up.”
Mathieu Racheter, head of equity strategy at Julius Baer:
“Given the export-oriented nature of the UK equity index, domestic economic conditions are not that important, but rather the impact is through the currency moves. That said, I don’t think it is clear yet what impact Bojo’s resignation has on the pound. One could argue for higher political uncertainty in the UK, but on the other side Bojo stepping down means lower uncertainty.”
Bloomberg News provided this article. For more articles like this please visit
bloomberg.com.
Read more articles by Greg Ritchie, Michael Msika
