Please find below, a Daily Investment Bulletin received from Brooks Macdonald this morning – 07/07/2022
What has happened
Despite fairly dire economic sentiment, equities made gains yesterday with European equities outperforming as they caught up on the late US rally on Tuesday night. Below the surface, investors continue to rachet up their probabilities of a recession with commodity prices falling and the US 10-year Treasury yield remaining below the 2-year yield, a historical precursor to recessions.
Boris Johnson
This paragraph has needed to be rewritten several times in the last hour but with the announcement that Boris Johnson will step down as Conservative leader, the scene is set for a leadership contest, the winner of which will become Prime Minister. Yesterday saw some fairly extraordinary scenes with a large number of ministers resigning but Boris Johnson remaining resolute that he retained a political mandate to govern after the large majority at the last general election. This morning, Downing Street officials briefed that Boris Johnson would resign as Conservative leader later today whilst remaining caretaker Prime Minister until the election process is concluded in the autumn.
What next
Sterling has seen a small bounce this morning versus the major currency pairs however until a clear leader emerges from the pack of contenders, the true economic and political impact of the change in leader will be hard to price in. At this stage we probably shouldn’t read too much into the bookmakers odds however Penny Mordaunt is leading. Mordaunt has distanced herself from the Prime Minister for several months, which could prove a factor amongst MPs as well as the Conservative membership, and pairs pro-Brexit leanings with liberal Conservatism – potentially appealing to both wings of Tory MPs. Conservative MPs will debate the benefits of each candidate, voting until two candidates remain, with the ultimate winner chosen by Conservative party members.
What does Brooks Macdonald think?
Back in 2019, sterling’s price was closely correlated with the perceived probability of a softer or harder Brexit. In recent weeks, with global central banks opting for differing levels of aggression in tackling inflation, currency pairs have largely been determined by expected differences in interest rate policy. This leadership contest however will undoubtedly draw the attention of currency markets given a) the new leader would have up to 2 years until the next general election b) EU/UK relations remain highly uncertain and c) the cost of living crisis makes fiscal policy even more important.
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David Purcell
7th July 2022