Boris Johnson resigns: What’s next for markets?

Transcript

Hello, I’m David Zahn and this is your European fixed income update. Boris Johnson has resigned as prime minister of the UK, which probably comes as not a huge surprise to most people, given he’s been under pressure for quite some time. The way the UK elects a new prime minister has a very set process, but it does take time.

And it really is that we need to have a new leader of the Tory party (Conservatives). So far, 10 candidates have thrown their hat in the ring saying, “I would like to be prime minister” with various different slates of what does that mean—tax cuts, Brexit, etc. It is quite varied, and so I don’t really think the markets will take a lot from it until we have a better clue as to which one or two people will be prime minister. As once they’re elected as the new leader of the Conservative Party, they become de facto prime minister, and then I’m sure Labor will be saying, “now we need to have a new election” because we need to basically ratify that this leader is the one that people want. Unlikely, the Tories want to do that because they would lose an election. So, I think that we have a period of time now where you have a caretaker government in charge. So no new policies will put through, which is difficult given we have a lot of uncertainty in the world at the moment.

But as far as financial markets, I don’t really think that bonds, currencies will really be that focused on it because until we know what the policies and new government are, we will just continue with the current policies. The fiscal room will be quite limited to allow tax cuts. So even though many may talk about cutting taxes, I think the chances are low.

But really what they want to do is they want to make a clean break from what Boris was doing and be a more conservative-run government. I would expect that, which means smaller spending lower taxes in general. But as I said, there won’t be a lot of fiscal room for that. And then we’ll have to see, will they try to mend the relationship with Europe, because that’s one of the biggest issues after Brexit.

It’s not been a very friendly relationship. That doesn’t mean Brexit is going to reverse itself, of course not, Brexit has happened. But it does mean that the relationship between Europe and the UK could become a little bit more friendly, which I think would probably be positive. Financial markets would take that as something that’s positive.

Overall though, the UK markets will be driven by growth. We’re probably heading into recession later this year. Inflation, which still remains stubbornly high, and the Bank of England is going to continue to hike rates to deal with that. And so, I think that’s what the currency and bond markets will look for. Bonds will probably continue to be under pressure and have higher yields until we can have some clearer focus of where the government is going to go with its new policies.

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