Boris Johnson resigns: what’s next for the markets?


David Zahn, CFA, FRM, Head of European Fixed Income, Franklin Templeton Fixed Income

Our Head of European Fixed Income, David Zahn, looks at the implications for the market of the resignation of British Prime Minister Boris Johnson.


Hello I am David Zahn and this is your European fixed income update. Boris Johnson has resigned as Prime Minister of the United Kingdom, which probably comes as no big surprise to most people, given that he has been under pressure for some time. How the UK elects a new Prime Minister follows a well-defined process, but it takes time.

And it is really that we need a new leader of the conservative party (conservatives). So far, 10 candidates have thrown their hats into the ring saying ‘I’d love to be Prime Minister’ with varying lists of what that means: tax cuts, Brexit, etc. It’s quite varied, and so I don’t do it. I really don’t think the markets will get much out of this until we have a better idea of ​​who will be prime minister. Like once they’re elected as the new leader of the Conservative Party, they become de facto Prime Minister, and I’m sure the Labor Party will say, ‘Now we have to have a new election’ because we basically have to ratify that. this chef is the one people want. Unlikely, the Conservatives want to do this because they would lose an election. So I think we now have a period of time where you have an interim government in charge. So no new policies will be put in place, which is difficult given that we have a lot of uncertainty in the world right now.

But when it comes to financial markets I don’t really think bonds, currencies will really be focused on that because until we know what the policies are and the new government we’ll just continue with the policies current. The fiscal room for maneuver will be quite limited to allow for tax cuts. So while many are talking about lowering taxes, I think the odds are slim.

But what they really want to do is they want to make a clean break from what Boris was doing and be a more conservative government. I would expect that, which means lower expenses and lower taxes overall. But as I said, there won’t be much budget room for that. And then we’ll have to see if they try to fix the relationship with Europe, because that’s one of the biggest problems after Brexit.

It was not a very friendly relationship. This does not mean that Brexit will reverse, of course not, Brexit has happened. But it does mean that the relationship between Europe and the UK could become a bit friendlier, which I think would probably be positive. The financial markets would see this as something positive.

Overall however, UK markets will be driven by growth. We are likely heading into recession later this year. Inflation, which remains stubbornly high, and the Bank of England will continue to raise rates to deal with it. And so, I think that’s what the money and bond markets will be looking for. Bonds will likely continue to be under pressure and to have higher yields until we can have a clearer view of the direction the government is going to take with its new policies.

What are the risks ?

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. . It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without the prior written permission of Franklin Templeton.

The opinions expressed are those of the investment manager and the comments, opinions and analyzes are rendered as of the date of publication and are subject to change without notice. Underlying assumptions and these opinions are subject to change based on market and other conditions and may differ from those of other portfolio managers or the company as a whole. The information provided herein is not intended to constitute a complete analysis of all material facts regarding any country, region or market. There can be no assurance that any predictions, projections or forecasts about the economy, stock market, bond market or economic trends in the markets will come to pass. The value of investments and the income from them can go down as well as up and you may not get back the full amount you have invested. Past performance is not necessarily indicative or a guarantee of future performance.

All investments involve risk, including possible loss of capital. The value of investments can go down as well as up, and investors may not get back the full amount invested. Bond prices generally move in the opposite direction of interest rates. Thus, as bond prices in an investment portfolio adjust to rising interest rates, the value of the portfolio may decline. Investments in lower rated bonds carry a higher risk of default and loss of principal. Changes in the credit rating of an obligation, or in the credit rating or financial strength of the issuer, insurer or guarantor of an obligation, may affect the value of the obligation. Investments in foreign securities involve special risks, including currency fluctuations, economic instability and political developments. Investments in developing markets involve increased risks related to the same factors, in addition to those associated with their relatively small size and less liquidity.

All research and analysis contained herein has been obtained by Franklin Templeton for its own purposes and may be relied upon in that regard and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this document and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although the information has been obtained from sources Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be changed at any time without notice. Mention of individual securities should not constitute or be construed as a recommendation to buy, hold or sell any securities, and the information provided regarding such individual securities (if any) does not constitute a sufficient basis for making a decision. of investment. FT accepts no responsibility for any loss arising from reliance on this information and reliance on comments, opinions and analyzes in the material is at the sole discretion of the user.

Products, services and information may not be available in all jurisdictions and are offered outside the United States by other FT affiliates and/or their distributors in accordance with local laws and regulations. Please consult your own financial professional or Franklin Templeton institutional contact for more information on the availability of products and services in your jurisdiction.

Issued in the USA by Franklin Distributors, LLC, One Franklin Parkway, San Mateo, CA 94403-1906, (800) DIAL BEN/342-5236, – Franklin Distributors, LLC, Member FINRA/SIPC, is the distributor principal of Franklin Templeton products registered in the United States, which are not insured by the FDIC; may lose value; and are not guaranteed by the bank and are only available in jurisdictions where an offer or solicitation of these products is permitted under applicable laws and regulations.

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

Comments are closed.