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UK Markets Are Full of Risk for Traders Glued to Political Drama

·4 min read

(Bloomberg) -- The political infighting at Westminster is reinforcing the views among traders who say UK markets are still brimming with risk.

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UK markets were stable on Tuesday, with the pound slipping to $1.2514 and the FTSE 100 Index holding firm, after Prime Minister Boris Johnson won the confidence vote from Conservative MPs. However, the deep divisions in the party show investors that on top of searing inflation, recession worries and higher interest rates, the UK’s top leadership lacks support.

“Political turmoil is always bound to leave a mark on UK investor confidence, but the full extent of any market moves will depend on how quickly the saga is truly put to bed,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown. “There’s still plenty of uncertainty looming about the stability of the current government, and until those jitters have gone, the market will struggle to find its place.”

Investors said the political instability is bound to worsen sentiment on the pound, the third worst-performing major currency this year. Even so, the consensus view is that risk appetite and Bank of England policy will have a bigger impact on the direction of the currency.

Boris Johnson’s Hollow Win Shows Civil War Raging in Tory Party

Stock investors interpreted the results as having little effect on the FTSE 100 Index, which has been supported by big commodity producers this year. Some strategists, including Lund-Yates at Hargreaves, said the lingering uncertainty is limiting gains.

In bond markets, analysts said the poor vote results may lead Johnson to push harder on introducing stimulus packages, which would worsen inflation and force the central bank to raise interest rates even more. British corporate borrowing costs are at an eight-year high of 3.83%, according to a Bloomberg index.

Here’s what other market-watchers had to say:

Viraj Patel, macro strategist at Vanda Research:

“We attribute the slide in risk sentiment and notably US equity futures as a bigger driver for GBP’s underperformance this morning. The political noise out of Westminster and ongoing left-tail risks of a snap election means that the pound is our least favourite high-beta currency to play any USD unwind or risk rebound this summer. We prefer the likes of AUD and CAD where the tailwind of rate hikes and lower recession risks are likely to see more sustained gains relative to the pound.”

Frederique Carrier, a strategist at RBC Wealth Management:

“This is unlikely to be the end of turmoil and the victory is not clear enough to draw a line under the past few months,” he said. “We think this increases the possibility of further stimulus measures as the PM attempts to improve his popularity.”

“Any further such supportive measures would likely boost further the bank rate year-end expectations.”

Victoria Scholar, head of investment at Interactive Investor:

“The pound is under pressure amid the political uncertainty with the prime minister and his law making powers severely damaged. History suggests the vote could mark the beginning of the end of his leadership, particularly given that a hefty 41% of his own party voted against him. Sterling is suffering amid a lack of international investor confidence in the UK, both economically and politically.”

Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital:

“It’s a marginal impact on equity markets,” he said. “The basic math of Parliament doesn’t change. The Conservative Party still rules. There is no general election, so there’s no major uncertainty about who’s going to run the country in the next six months, even if Boris Johnson would eventually be replaced. It’s still a Conservative government with more or less the same conservative policies. So the amount of policy uncertainty is very limited.”

James Athey, investment director at Abrdn:

“From some of the headlines we’ve seen today, maybe he’s going to try and win over some of the skeptics within the party by averting course on some of the less of traditional conservative policies that he’s been pursuing. There’s some suggestion that he’ll look to cut tax as much to assuage people within his own party, as to assuage the population. But I wouldn’t expect equity markets to be particularly moved.”

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