The FTSE 100 was dashing in and out of small gains and losses as I wrote this, whilst sterling against the dollar was making its second round trip in an 2½ hours between the day’s highs and the day’s lows, spanning more than 60 price points.
If these indications are correct, the immediate aftermath of Boris Johnson delivering the latest shock on Thursday to Britain and its markets in the wake of the Brexit vote—that he will not stand for the Conservative leadership—is a moderate increase in volatility. Markets were already reeling from the sudden about turn by Michael Gove, who said he would now stand, contrary to dozens of denials over the past year and beyond.
The market’s bewilderment with these twists and turns was evident, but not overdone. The FTSE was settling into a small gain on the day at last check.
Could it be that whilst the rightward shift in the Conservative leadership race is unexpected, the prospect of a more solidly defined character winning, and, by default becoming Prime Minister, is being taken positively by The City?
Having lost much currency with his own party during the referendum campaign and even more after the result, Boris Johnson falling at such an early hurdle might save the market (and Britain) a lot of pain in the run up to the Conservative Party conference and also during inevitably tortuous negotiations with Brussels.
The old adage that markets dislike uncertainty seems to apply. A surprising increase in certainty seems to be outweighing the negative effect of renewed volatility from Thursday’s late-morning events.
EU negotiations might now begin sooner than expected, if signs of a push to elect a Conservative leader as early as September prove accurate. If EU/UK horse trading does kick off early, uncertainty could be reduced even further. (Almost regardless of how favourable or unfavourable the outcome is deemed to be.)
However, the latest twists and turns of the Brexit saga have done little to improve the market’s ability to assess the U.K.’s prospect of extracting the best possible deal with the EU.
On that basis, it’s still difficult to believe that ‘risky’ assets like stocks and sterling will be able to hold their newly regained poise for much longer. Especially if signs of stability do not emerge in Westminster soon.
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