FTSE and Sterling ( £) Jump To UK’s Premier Vacating of Office

Highlights

• Early Thursday the Sterling dropped to two-year lows against the dollar
• UK market gain, in line with broader markets
• Crucial economic concerns overshadow Johnson’s political drama
• Investors await the new finance minister’s priorities

UK markets on Wednesday waited for more Johnson political drama, as the Prime Minister was left in shock after more ministerial resignations. He was also facing calls to let go early Thursday. 

According to British Media Reports, the UK Premier has agreed to step down.

Meanwhile, investors are unwilling to take more bets until they are certain of the economic priorities of the new finance minister, Nadhim Zahawi.

Now with a chain of scandals around his neck, bookmakers give low odds on Johnson’s surrender. And with his exit becoming more of when than if, market analysts believe that stock prices were largely factored on his departure.

The sterling lost to the dollar in what analysts say it’s the lowest drop in more than two-year. The drastic change is not primarily driven by the political drama but due to a wider scramble for safety in the U.S. dollar from recession risks.

On the flip side, the British stocks edged, recovering from a day of massive losses. Some analysts linked the gains with the expectation of higher public expenditure that may come under a new finance minister. However, the rise in share prices was trending with the broader markets.

The UK economic backdrop since the pandemic and concerns about her weak economic prospects and rising inflation are the issues investors are grappling with and overshadow the Westminster political drama.

David Page said, 

Markets are currently focused on overseas developments, such as the potential for recessions in important international countries, tightening global financial conditions, and impending oil shortages. As a result, financial market reaction has been rather muted.

Page is the head of macro research at AXA Investment Managers.

He further noted, “However, the longer UK political uncertainty persists, the more we would expect it to be apparent in UK financial markets.”

Boris’s leadership has been questioned after the “Partygate” scandal weakened his authority over the lawmakers. 

His grip on power was further weakened with the resignation of the finance minister, Rishi Sunak and Sajid Javid, health secretary, on Tuesday.

There was more pressure on Wednesday, with more resignations expected.  Analysts warned that markets have a rough time looking for direction until Johnson’s fate is sealed. 

 Market highlights by Thursday, 1545 GMT,

• Sterling down 0.5% to $1.1899
• sterling climbed 0.5% against the Euro to 85.46 pence
• Britain’s FTSE 100 (FTSE) closed up 1.17%
• FTSE 250 (FTMC) hiked 1.52%.
• UK government bond yields rose but kept below recent highs.

 “Expectations are that the new chancellor will lean towards more fiscal generosity than his predecessor has been recently,” said Paul O’Connor of Multi Asset Team at Janus Henderson, UK. 

“The new chancellor is not going to be in a position to substantially alter the course of the UK economy,” he added.

The new finance minister will have to deal with many economic challenges ranging from decades-high inflation to consumer loss of confidence and a stagnant economy.

The BoE’s trade-weighted sterling index, which measures the sterling against other currencies, to its lowest on Monday since January last year, with investors expecting little respite for sterling

“We see two key factors driving the markets’ indifference to political risk in the UK. Firstly, markets have now all but written off Johnson as PM going forward,” said Stuart Cole at RBC.

“Secondly, there is no clear frontrunner to replace Johnson, so it is hard to take a view on what his departure would mean for policy.”

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