UK markets brace for prolonged political uncertainty

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SINGAPORE/LONDON, July 6 (Reuters) – British markets braced for greater political uncertainty on Wednesday, with investors keen to see if the new finance minister loosened the purse strings and wondered if Prime Minister Boris Johnson would survive to an exodus of support.

The pound was stuck near its two-year low against the dollar and British stocks rebounded.

Some analysts attributed the gains to hopes of increased government spending, but the rise in prices was in line with gains in broader markets and followed sharp falls on Tuesday, when Johnson’s grip on power faltered. been rocked by Rishi Sunak stepping down as finance minister and Sajid Javid stepping down. as health secretary.

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Several others have left their posts as junior ministers or envoys. Read more

Analysts said markets were struggling to decide what this week’s events meant until they had a better understanding of the priorities of Nadhim Zahawi, the new finance minister, and whether Johnson could weather the storm. . Read more

British stocks, which fell sharply on Tuesday alongside a market sell-off, rose on Wednesday. Britain’s FTSE 100 (.FTSE) rose 1.44% while the more domestically focused FTSE 250 (.FTMC) rose 1.21%, in line with eurozone stocks.

The pound was unchanged at $1.1961, unchanged on the day but slightly above the $1.1899 hit on Tuesday.

“Financial markets will assess developments here in terms of their impact on economic policy. The new Chancellor is expected to lean towards more fiscal generosity than his predecessor has been recently,” Paul O’ said. Connor, head of the UK-based multi-asset team. at Janus Henderson.

But O’Connor said the new finance minister faced huge challenges, including collapsing consumer confidence, decades-high inflation and a slowing economy.

“The new chancellor will not be able to substantially alter the course of the UK economy,” he added.

Wider macroeconomic developments, including concerns over the fallout from a further surge in natural gas prices, hit UK stocks and the pound hard on Tuesday and continued to overshadow the political drama unfolding in Westminster.

MORE VOLATILITY

While Johnson’s new team could unveil short-term populist spending measures to bolster support, his post as prime minister remains uncertain after a slew of ministers resigning saying he was unfit to govern. He faces questions in parliament on Wednesday, followed by a toasting by senior lawmakers.

Investors expect little short-term respite for the pound. Implied volatility for the pound hit a two-week high as traders expect a rocky road ahead for the currency.

The BoE’s trade-weighted sterling index, which measures the pound against a basket of currencies, fell on Monday to its lowest level since January last year.

Bookmakers raised bets on Johnson leaving before the end of the year to 85% on Wednesday from 50% on Tuesday, according to RBC Capital Markets.

“We see two key factors driving the markets’ indifference to political risk in the UK. First, the markets have now all but written off Johnson as prime minister in the future,” said RBC’s Stuart Cole , citing data from bookmakers.

“Secondly, there is no clear favorite to replace Johnson, so it is difficult to have an opinion on what his departure would mean for politics.”

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Reporting by Tom Westbrook and Vidya Ranganathan in Singapore Additional reporting by Herbert Lash in New York; Written by Tommy Reggiori Wilkes; Editing by Sam Holmes and Alison Williams

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