Boris Johnson has announced today his resignation as leader of the Conservative party and has indicated he will step down as Prime Minister following the election of a new leader of the party. He quits Downing Street after almost three years in the job, despite having won a huge majority in the 2019 general election. The decision follows the resignation of 50 MPs holding various Government and Conservative party roles, and after the 41% of his parliamentary party voted that they had no confidence in him.
We have received the first commentaries from the industry with the thoughts of how this decision might affect the financial markets and the British economy.
Modupe Adgebembo, Economist at AXA Investment Managers
Financial markets reacted to today’s announcement. Sterling rose against the dollar (0.3%) and the euro (0.4%) following the announcement of Johnson’s resignation, reflecting an easing in some of the longer-term political uncertainty. Gilt yields also rose with 2-year yields up 6bps to 1.81% and 10-year yields up 2bps to 2.13%, but both having been higher before Johnson’s decision to stay on. Equity markets also rose – the FTSE 100 was in fact broadly unchanged on the news – but the more domestically-focused FTSE 250 rose 0.3% on the announcement and has broadly held that gain. The immediate outlook is likely to hinge on whether Johnson manages to stay on for the next two months – in which case markets risk a period of additional volatility going into the summer. However, if Johnson were replaced by another ‘caretaker’, the prospect of domestic policymaking would fall, something which should reduce any expected volatility.
Silvia Dall’Angelo, Senior Economist at Federated Hermes Limited
The Prime Minister’s resignation makes additional fiscal easing unlikely, but options have always been limited, despite Johnson’s urge to loosen the purse strings. Fiscal space has been constrained following the increase in public debt that pandemic-related stimulus brought about, and further blanket fiscal easing – as opposed to targeted and limited measures to support the most vulnerable households – would stoke additional inflationary pressures. Meanwhile, monetary policymakers also face a dilemma, as elevated realised inflation risks become engrained against the backdrop of a tight labour market. The Bank of England will likely continue to tighten monetary policy, leaning against the risk of second-round effects, but it will proceed carefully in light of the downside risks to growth. At the margin, recent political developments will make the Monetary Policy Committee somewhat more cautious.
Laura Foll, Fund 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.