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

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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.

Transcription

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.

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