Sterling and British shares brace for further political turmoil for Johnson

British prime minister Boris Johnson is facing mounting pressure to step down.

British financial markets were braced for more political uncertainty, with investors keen to see if the new chancellor of the exchequer loosens the purse strings and wondering whether Prime Minister Boris Johnson will survive an exodus of support.

Sterling dropped to more than two-year lows against the dollar but British shares climbed.

Some analysts attributed the gains to hopes for more public spending, but the rise in share prices was in line with gains across broader markets and followed big falls on Tuesday, when Mr Johnson's grip on power was rocked by Rishi Sunak quitting as finance minister and Sajid Javid resigning as health secretary.

Several others have left their junior ministerial or envoy roles. Analysts said markets would struggle until they had a better understanding of the priorities of Nadhim Zahawi, the new chancellor, and whether Mr Johnson could weather the storm. 

UK stocks, which fell heavily on Tuesday along with a wider market selloff, rose on Wednesday. The Ftse-100 index was up 1.6% while the more domestically focused Ftse-250 index was also up, broadly in line with eurozone shares.

The pound slipped to $1.18, its lowest level since March 2020. Against a broadly weaker euro the pound was up at 85.63 pence. 

"For now, financial market reaction has been limited, with markets focused on international developments, including the prospect of recessions in key international economies, tightening global financial conditions and looming energy shortages," said David Page, head of macro research at Axa Investment Managers.

"However, the longer UK political uncertainty persists, the more we would expect it to be apparent in UK financial markets," he said.

Broader economic developments, including concerns about the fallout from a new surge in natural gas prices, had hit UK stocks and sterling hard earlier this week and continued to overshadow the political drama unfolding in Westminster.

"Financial markets will evaluate developments here in terms of their impact on economic policy. Expectations are that the new chancellor will lean towards more fiscal generosity than his predecessor has been recently," said Paul O’Connor, head of UK-based Multi Asset Team at Janus Henderson.

But Mr O'Connor said the new finance minister faced huge challenges, including collapsing consumer confidence, decades-high inflation and a slowing economy.

"The new chancellor is not going to be in a position to substantially alter the course of the UK economy," he added.

While Mr Johnson's new team could unveil populist spending measures, his support, his premiership remains in doubt after the resignations. 

- Reuters