Markets weigh Tory rebellion against Boris Johnson and UK stagflation fears      

The Ftse-250 index ended almost 1% lower while the pound at one stage traded at 85.48 pence against the euro

A placard is held on College Green in central London, ahead of Boris Johnson facing a vote of no confidence by Tory MPs on Monday night.

Sterling eased slightly against the euro, while UK gilts were little changed and UK shares slipped, as traders weighed the potential for an extended period of British political uncertainty following the large Tory Party rebellion that may lead to the ousting of UK prime minister Boris Johnson.

The yield on the 10-year gilt traded at 2.23%, slightly lower in the session, the Ftse-250 index which provides a wide picture of firms exposed to the British economy ended almost 1% lower, while the pound at one stage traded at 85.48 pence against the euro, and at $1.2502. 

The scale of the rebellion will ensure a cloud remains over Mr Johnson’s future, said Jane Foley, head of FX strategy at Rabobank in London. 

However, market observers said the focus remained on the risks of potential stagflation stalking the British economy, which has the highest inflation in the Group of Seven global economies, more than the political turmoil at Westminster. 

Instead, inflation, interest rates, and concerns over the outlook of growth in the British economy continued to dominate, said Ryan McGrath, head of fixed income strategy and sales at Cantor FitzGerald Ireland. 

Bond markets had "brushed it off", Mr McGrath said, referring to  the confidence vote in Mr Johnson's premiership.          

At 2.23%, the UK 10-year gilt compares with the yields of 1.28% for Germany and 1.86% for Ireland. 

Important ECB meeting

Ahead of the key European Central Bank meeting on Thursday, the yield on the 10-year Italian bond traded at 3.40%. 

Meanwhile, UK stock markets continued to focus on the potential sharp economic slowdown. 

"Johnson has effectively lost authority and the UK faces a period of political drift ... Markets don't like uncertainty and this is reflected in the UK this morning," said Stuart Cole, head macro economist for Equiti Capital. 

British shoppers facing a surge in inflation cut their spending in May by the most since the country was in a Covid-19 lockdown in early 2021, according to a survey. 

Ted Baker shares plunged after the fashion chain said its preferred bidder will not make a takeover offer. 

Britain's biggest sportswear retailer JD Sports fell after the UK's competition watchdog provisionally found that JD Sports and Elite Sports, along with the Rangers Football Club, fixed retail prices of certain Rangers sports clothing. 

• Irish Examiner and Reuters