UK markets get set for a weary wait after latest political drama

Britain’s stock markets were set to recover on Wednesday after their worst single-day drubbing in three weeks, even as investors braced for months of political uncertainty and questions over the survival of a scandal-hit prime minister.

Stock futures FFIc1 on the benchmark FTSE 100 index .FTSE suggested markets might rally more than a percent when London opens, recovering from Tuesday’s near 3 per cent tumble after the resignations of his finance and health secretaries plunged Prime Minister Boris Johnson’s government into another crisis.

Johnson showed his determination to remain in office by appointing Nadhim Zahawi, previously education minister, as his new finance minister, and filling some of the other vacancies.

But his premiership is in doubt after the slew of resignations from ministers saying he was not fit to govern. He faces questions in parliament on Wednesday, followed by a grilling by senior lawmakers.

Investors expect little respite in the near term for sterling GBP=D3, which is at a two-year low versus the dollar.

“I think this news is not a shock to a lot of people. Everyone’s sort of doing the rounds and looking at who could potentially come in,” said Chris Weston, head of research at Melbourne-based brokerage Pepperstone.

“The price action that we’re seeing in the pound is very thematic of a market that believes we’re going to see policy continuation.”

The one positive investors appeared to bet on was that the crisis would lead to a softening of outgoing finance minister Rishi Sunak’s hitherto tough stance on Brexit negotiations and fiscal spending.

“The new leader will want to win over voters and the Tory party - so perhaps down the line we see fiscal subsidies for energy and tax cuts to win over the Tory faithful,” said Jordan Rochester, a currency strategist at Nomura.

“But first you need an actual winner of a leadership contest this can take roughly up to six to eight weeks or so ... then after that we wait for the decisions by a new chancellor.”

Still, regardless of the change in leadership, Britain is staring at a highly challenging macro backdrop of rising prices, a record current account deficit and a greater risk of recession than other major economies.

The Bank of England has raised interest rates five times since December IRPR but traders have scaled back expectations for further tightening this year on worries a higher cost of borrowing would further hurt the economy.

Brexit tensions, namely the escalating row over Northern Ireland’s status that threatens to upend British trade ties with the European Union, have also hurt sterling.

After touching $1.1899 overnight, the currency steadied at $1.1964 in Asia. It is down nearly 12 per cent this year.

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

The FTSE 100 index closed at its lowest level since June 24 on Tuesday. Still the index, dominated by healthcare, mining and banking stocks, is down 4.8% this year, far less than the US S&P 500’s .SPX near 20 per cent fall.

“Are things going to change if we get a new government? Are the problems going to be solved if the prime minister gets replaced?” said Axel Merk, president and chief investment officer of Merk Investments, Palo Alto, California. “It’s a lot of local drama.”