UK markets brace for weary wait after latest political drama

SINGAPORE, July 6 (Reuters) – Britain’s stock markets were expected to rally on Wednesday after their worst day of beating in three weeks, even as investors braced for months of political uncertainty and questions over the survival of a Prime Minister. minister affected by the scandal.

Equity futures on the benchmark FTSE 100 index (.FTSE) suggested markets could rally more than a percent at the London open, recovering from the nearly 3% drop in on Tuesday after the resignations of its finance and health secretaries plunged Prime Minister Boris Johnson’s government into another crisis. Read more

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

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But his post as prime minister is in doubt after the slew of ministers resigned saying he was unfit to govern. He faces questions in parliament on Wednesday, followed by a toasting by senior lawmakers.

Investors expect little short-term respite for the pound, which is at a two-year low against the dollar.

“I don’t think this news comes as a shock to a lot of people. Everyone is going around and looking at who could potentially come in,” said Chris Weston, head of research at Pepperstone, a Melbourne-based brokerage. .

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

The only bright spot investors seemed to be betting on was that the crisis would lead to an easing of outgoing Finance Minister Rishi Sunak’s hitherto tough stance on Brexit negotiations and budget spending.

“The new leader will want to win over voters and the Conservative party – so maybe we’ll see energy tax subsidies and tax cuts to win over loyal Tories,” said Jordan Rochester, currency strategist at Nomura. .

“But first you need a real winner of a leadership contest, it can take about six to eight weeks or so…then after that we wait for the decisions of a new chancellor.”

Yet regardless of the change in direction, Britain faces a very difficult macroeconomic backdrop of rising prices, a record current account deficit and a higher risk of recession than other major economies.

The Bank of England has hiked interest rates five times since December, but traders have lowered their expectations for further tightening this year, fearing that a higher cost of borrowing could further hurt the economy. ‘economy.

Brexit-related tensions, namely the growing row over the status of Northern Ireland which threatens to upend Britain’s trade relationship with the European Union, also hurt the pound.

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

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

The FTSE 100 index closed Tuesday at its lowest level since June 24. Yet the index, dominated by healthcare, mining and banking stocks, is down 4.8% this year, much less than the nearly 20% drop in the US S&P 500 (.SPX) .

“Will things change if we get a new government? Will the problems be solved if the Prime Minister is replaced? said Axel Merk, President and Chief Investment Officer of Merk Investments, Palo Alto, Calif. “It’s a lot of local drama.”

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Reporting by Tom Westbrook and Vidya Ranganathan in Singapore Additional reporting by Herbert Lash in New York; Editing by Sam Holmes

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