Theresa May Resigns: What’s next for the Markets?

Chris Lee

The Brexit journey has been a saga of extensions, no-confidence votes, rejected deals and turbulent markets. Now, in what may be the final chapter of the Brexit disaster movie, Theresa May has quit as leader of Conservatives and prime minister of the UK. As the Conservative party looks to elect a new leader to steer Brexit to its conclusion, the most turbulent and important times for traders could lie ahead.

The British Pound and stocks exposed to the UK economy are poised to tumble or sky-rocket depending on who takes over the position of prime minister. Each of the candidates will have drastic consequences for the markets and the future of Brexit.

The Resignation

On 24 May, outside 10 Downing Street, Theresa May announced that she would resign as prime minister and leader of the Conservative party, serving her final day in power on 7 June. The leadership race is scheduled to begin on 10 June to decide on a new prime minister by the end of July.

The week of May’s resignation saw the Pound plummet to new lows. Sterling fell to 1.13 against the Euro and 1.26 against the Dollar respectively, the lowest since January. The month of May was the worst for the currency since 2016, as traders speculated about May’s exit following pressure from Tory backbenchers. The markets made a slight recovery in the immediate wake of Theresa May’s resignation, with the Pound rising slightly to 1.27 against the Dollar.

The Leadership Contest

Twelve MPs have put themselves forward in the race to become the next prime minister before parliament’s summer recess. Three of the candidates are favourites to take Theresa May’s place: in first is former foreign secretary and London mayor, Boris Johnson, in second is Environment Secretary Michael Gove, and in third, former Brexit secretary, Dominic Raab. A recent YouGov poll found that 39% of Tory members believed Johnson would make a good leader, compared to 9% for Michael Gove and 13% Dominic Raab.

The list of candidates alone is enough to begin speculation and volatility on the markets. As May exits the party, so does the likelihood of a softer Brexit deal. The leadership candidates are generally in favour of a harder Brexit, with Boris Johnson positioned at extreme end of the Brexit spectrum in embracing the possibility of a no-deal exit from the EU.

The Pound

If the polls prove correct and Boris Johnson is elected as prime minister, traders will have to speculate on the likelihood of passing a no-deal Brexit through parliament. A no-deal Brexit may be more likely given the surge in popularity for Nigel Farage’s Brexit Party in the European parliamentary elections – a result which may weigh on the mind of the next Prime Minister. The threat of a no-deal Brexit is expected to bring the Pound lower, particularly in light of UBS’ recent suggestion that the Pound could fall by 10 per cent against the Dollar, if the UK exits the European Union without a deal.

As the beginning of the official leadership contest nears, the Pound is poised for even more volatility as traders weigh up the likelihood of a no-deal exit, digest the swelling support for the Brexit Party, and follow updates of the Tory leadership contest.

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Chris Lee

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