MUFG: Johnson's resignation doesn’t change the terrible fundamental outlook

July 7, 2022

Below are the comments on the resignation of Boris Johnson from Derek Halpenny, Head of Research, Global Markets EMEA & International Securities at MUFG.

What’s Next?

PM Boris Johnson just made a national address and confirmed his resignation (clearly reluctantly). The level of political uncertainty has clearly now dropped although uncertainty has not completely gone given he has indicated he will stay on until Sept/Oct. Kier Starmer has threatened to bring a no-confidence motion to the floor of parliament if he does not go immediately.

Is the commitment to lay out a plan for transition next week enough to stave the Labour party from following through on that promise? There are certainly rumours of many Tory MPs not happy with the idea of Johnson remaining in a “caretaker” role until Sept/Oct.

New Leader

Johnson in his statement earlier indicated a plan on electing a new leader would be laid out next week. I’d expect a number of candidates to go for the leadership of the party and hence to become the new PM. Tory MPs will then vote in a number of rounds (depending how many go for it) to whittle the candidates down to the final two.

Those two will then be put to the Conservative members in the country. The process will run I assume through September with a new leader in place ahead of the Tory Conference in October. With Boris Johnson staying, the 1922 Committee may want to expedite the process so a quicker pace than in 2019 is very feasible.

In 2019 the process began with parliament balloting 10 candidates on 13th June with the final result from amongst Tory members announced on 23rd July. A YouGov poll released this morning covering Conservative members in the country has Ben Wallace (13%); Penny Mordaunt (12%); Rishi Sunak (10%); and Liz Truss (8%) as the top four candidates.

Penny Mordaunt is the favourite amongst Tory MPs putting her in a strong initial position it seems. In addition, Ben Wallace in one-v-one polling comes out stronger than the rest of the field leaving him also in a strong position.

Market Impact

Rates are moving in line with euro rates and catching up with US rates over night so I would conclude no real impact in terms of rates expectations stemming from the political developments. In terms of FX GBP has rallied and I would conclude a small impact here.

Possible light short-term positioning squeeze with the political uncertainty resolved. But it is not the only driver for sure. Rumours that Europe is preparing a natural gas rationing program is pressuring EUR and EUR/GBP was down 0.5% earlier. Rates over recent previous days favour lower EUR/GBP with euro-zone growth fears hit more by natural gas concerns.

We remain GBP bears on broader macro outlook and do not see politics as playing much influence in that. The political uncertainty of recent days has played little role in GBP moves of late and hence we do not see a circumstance of GBP volatility or one-way momentum related to political developments.

Any new incoming PM will be severely constrained in near-term policy choices based on the grave global and UK-specific outlook that lies ahead.

At the margin a more coherent economic policy framework under a new PM is a positive but it doesn’t change the terrible fundamental outlook over the remainder of the year. The FTSE 250 is underperforming more equity markets in Europe as I write.