UK markets brace for prolonged political uncertainty

• The pound fell to levels not seen in more than two years, but British stocks rose.
• Analysts attributed the gains to expectations for increased government spending.
• The pound increased by 0.3 percent compared to an overall lower euro on Wednesday.

As investors watched to see if the new finance minister loosens the purse reins and pondered whether Prime Minister Boris Johnson will survive a defection of support, British markets braced for fresh political unrest on Wednesday.

In contrast to the dollar, the pound fell to levels not seen in more than two years, but British stocks rose.

Some analysts attributed the gains to expectations for increased government spending, but the increase in share prices was consistent with gains on more general markets and came after sharp declines on Tuesday, when Johnson’s hold on power was shaken by the resignations of Sajid Javid as health secretary and Rishi Sunak as finance minister.

Others have resigned from their positions as junior ministers or envoys.

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Markets would have difficulties, according to analysts, until they knew more about Johnson’s resilience and the ambitions of the incoming finance minister, Nadhim Zahawi.

UK equities increased on Wednesday after falling sharply on Tuesday along with a broader market selloff. The more locally focused FTSE 250 (.FTMC) surged 1.24 percent, closely in line with euro zone equities, while Britain’s FTSE 100 (.FTSE) increased by 1.60 percent.

The pound dropped to its lowest point since March 2020 at $1.1877. The pound increased by 0.3 percent to 85.635 pence in comparison to an overall lower euro.

According to David Page, head of macro research at AXA Investment Managers, “for the time being, financial market reaction has been muted, with markets focused on international developments, including the prospect of recessions in key international economies, tightening global financial conditions, and impending energy shortages.”

The longer UK political uncertainty lasts, though, the more we would anticipate it to show up in the country’s financial markets.

Wider economic events, such as worries over the effects of a recent spike in natural gas prices, had negatively impacted UK stocks and the value of the pound on Tuesday and continued to cast a shadow over the political drama playing out in Westminster.

“Markets for financial instruments will assess these changes in light of their implications for economic policy. The next chancellor is anticipated to tilt toward fiscal leniency more than his predecessor lately, “said Paul O’Connor, manager of Janus Henderson’s Multi Asset Team in the UK.

O’Connor, however, claimed that the new finance minister was up against formidable obstacles, such as plummeting consumer confidence, historically high inflation, and a faltering economy.

He continued, “The incoming chancellor will not be able to significantly alter the direction of the UK economy.”

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