After suffering their largest single-day loss in three weeks, the UK Stock Market were expected to rebound on Wednesday, even as investors braced for months of political unpredictability and doubts about the future of a scandal-plagued prime minister.
Stock futures on the benchmark FTSE 100 index (.FTSE) indicated that markets may rise more than 1% upon the opening of London, reversing Tuesday’s nearly 3% decline following the resignations of Prime Minister Boris Johnson’s finance and health secretaries, which threw his government into yet another crisis.
Johnson demonstrated his commitment to holding onto power by choosing Nadhim Zahawi, formerly the minister of education, as his new finance minister and filling a few other openings.
However, his position as premier is in jeopardy following a wave of resignations from ministers who claimed he was unable to lead. On Wednesday, he will answer questions in the legislature before being interrogated by top legislators.
Investors see little relief for sterling, which is at a two-year low versus the dollar, in the immediate future.
“I don’t believe that many people will be shocked by this revelation. Everyone is sort of making the rounds and watching for possible visitors “Chris Weston, the director of research at the Melbourne-based Pepperstone brokerage, said.
The price movement of the pound is quite indicative of a market that anticipates policy continuity, according to the author.
Investors’ one hope seemed to be that the crisis would cause Rishi Sunak, the outgoing finance minister, to modify his previously hardline attitude on fiscal spending and Brexit discussions.
According to Jordan Rochester, a currency analyst at Nomura, “the next leader will seek to win over voters and the Tory party — so potentially down the line we see fiscal subsidies for energy and tax cuts to win over the Tory faithful.”
However, it may take up to six to eight weeks to determine the actual winner of a leadership election. Following that, we must wait for the new chancellor’s judgments.
Despite the change in leadership, Britain continues to face a very difficult macroeconomic environment that includes rising prices, a record current account deficit, and a higher chance of recession than other large countries.
Since December, the Bank of England has increased interest rates five times; however, traders have reduced their forecasts for additional tightening this year due to concerns that an increase in borrowing costs might further harm the economy.
Sterling has been weakened by Brexit-related issues, particularly the growing dispute over Northern Ireland’s status that threatens to disrupt British trade relations with the EU.
After reaching $1.1899 over night, the exchange rate remained steady in Asia at $1.1964. It has decreased by almost 12% so far this year.
The pound’s value against a basket of currencies is represented by the BoE’s trade-weighted sterling index, which dropped on Monday to its lowest level since January of last year.
On Tuesday, the FTSE 100 index reached its lowest point since June 24. Even still, the index, which is heavily weighted in healthcare, mining, and banking firms, is down 4.8 percent this year, a much smaller decline than the nearly 20 percent decline seen by the US S&P 500 (.SPX).
“Will things alter if we elect a new government? Will the issues be resolved if the prime minister is removed? “asked Axel Merk, chief executive officer and president of Palo Alto, California-based Merk Investments. There is a ton of regional drama.