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UK Market has a limited response to no confidence vote

Westminster
Westminster

 

  • FTSE 100 fails to budge as Prime Minister squeezes past no confidence vote
  • US has a slightly positive start to the week, Twitter saga continues
  • Asian markets react to Australian rate hike
  • Brent crude futures rose above $120 per barrel – demand for oil is expected to be boosted by easing Covid restrictions in China

Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown:

“The FTSE 100 has largely shrugged off the political drama of yesterday’s no confidence vote, with a dramatic reaction avoided. However, the situation has put a ceiling on progress, with no meaningful additions to the 75 point gains the FTSE began the week with. Political turmoil is always bound to leave a mark on UK investor confidence, but the full extent of any market moves will depend on how quickly the saga is truly put to bed. There’s still plenty of uncertainty looming about the stability of the current government, and until those jitters have gone, the market will struggle to find its place.

The pound has edged lower, it’s down to £1.247, heading back towards two-year lows. There is speculation that the result could end up weakening the economy further if the Prime Minister takes measures to boost his political standing among the party. This could include a tougher stance towards the EU in terms of trade and the Northern Ireland protocol, and by cutting taxes which could add to inflation by supporting demand in the economy for longer. This could pile more pressure on the Bank of England to raise interest rates more steeply.

Things are a little brighter in the US where the Nasdaq climbed 0.4%, the S&P 500 0.3% and the Dow Jones was broadly flat overnight. A lot of this is a function of no news being good news, with there being a relative lull in activity in the economic and market arenas. Of course, Elon Musk is doing his best to be heard in the quiet, with news breaking that he has threatened to walk away from the $44bn takeover of Twitter, saying the social media giant is hampering his requests to learn more about its user base. Some would argue this is a tactic to negotiate a lower price, but there’s also a very real possibility Mr Musk chooses to ditch the deal. History has shown he’s not a traditionalist so the fact that walking away would be difficult and costly, frankly won’t hold too much weight.

Asian markets are having a tough time, with losses led by the ASX. This comes as the Reserve Bank of Australia has raised interest rates by half a percentage point, which is more than had been expected. While this move has come as a surprise, it’s possibly a function of faster hikes, rather than the total amount being more than expected. A tempering or even freezing of future hikes is possible, but this rests on how successfully this latest move controls the less-than-ideal economic situation.

Easing Covid restrictions in China are expected to boost demand for oil in the coming weeks, meaning Brent Crude is still hovering around $120 a barrel. This is despite promises from the oil cartel, OPEC+, it plans to increase output in July and August by 648,000 barrels per day – 50% more than previously planned. Its ability to produce these ramped up volumes is being questioned, and together with Saudi Arabia’s decision to hike prices higher than expected, are all feeding into continued supply anxiety, which is keeping prices high.”

Modupe Adegbembo, G7 Economist at AXA Investment Managers, comments:

 

·        PM Boris Johnson remains the leader of the Conservative party after receiving 148 votes of no confidence compared to the 180 vote threshold for the PM to be removed. Despite this on-paper victory, the PM’s leadership has been severely challenged with the PM receiving votes of no confidence from over 40% of his parliamentary party, a figure at the upper end of expectations prior to the vote. The rules set out by the 1922 Committee mean that a vote of no-confidence cannot be called against PM Johnson for 12 months.
Victorious but wounded

It is extremely rare for a Conservative leader to lose a no-confidence vote, but even surviving the vote can substantially undermine a leader’s position. In proportional terms, the PM received less of a vote share of support than May in 2018, John Major in 1995 and Margaret Thatcher 1990. Historic experiences are instructive – Theresa May was the last Prime Minister to face a vote of no-confidence in December 2018. The former PM managed to win the support of around two-thirds of Conservative MPs – a much higher proportion than Boris’ vote, allowing her to continue in post, but she ultimately resigned six months later.

Hurdles ahead for leadership

The three previous Prime Ministers to face confidence votes went on to resign. It is not clear that PM Johnson will face the same qualms of conscious to force him to do the same. But the PM remains vulnerable, arguably even more so than prior to the ballot as the scale of the opposition to his leadership is now known. Upcoming by-elections in Wakefield and Tiverton & Honiton on the 23rd June look set to add to pressure on the Prime Minister. Conservatives are widely expected to lose their seat in Wakefield and polling suggests they are likely to also struggle to hold Tiverton & Honiton, despite having a large majority of over 24k. Such a loss would be certain to pile additional pressure on the PM.

Implications for macro policy

We do not expect that today’s vote will have a significant impact on the macro environment in the near term. Fiscal policy and the outlook for monetary policy is likely to remain unchanged (we expect the BoE to hike 4 more times this year). However we do see the risks that a weakened PM seeks to shore up support amongst the public and MPs using fiscal giveaways. It also increases the risk of more populist policies to try and regain lost support. This may include more extreme action with regards to Northern Ireland. All of this will add to an already uncertain macroeconomic background.

Markets posted little immediate reaction to the results of the vote, sterling fell against the dollar by 0.1%, falling back further this morning by 0.7% at the time of writing.

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