General, Indices, Forex

How Theresa May’s departure could affect the markets

Ben Weiss, Thursday, 23 May 2019

DS-min
Downing Street, the residence of Prime Minister Theresa May.

It was nice while it lasted, but Brexit is now firmly back in the headlines after recently being on the back burner.

On Tuesday, Theresa May addressed the nation and put forward a new Brexit deal, but it’s done little to secure her position as PM. In fact, it has seemed to have done the opposite, and now there’s increasingly overwhelming pressure for her to resign. But how have the markets reacted, and how will the markets be affected if May does leave Downing Street?


What is May’s new deal?

The government are yet to publish the deal, but May outlined its key aspects during her speech. Among them was the guarantee of a Commons vote on holding a second referendum, a vote on potential options for a customs union and assurances over the highly debated Irish backstop. Despite claims that it would be published this Friday, this won’t actually be fully released until the first week of June.

Labour are not buying this new deal, calling it ‘a rehash of the old deal,’ and it seems even Tories are not all convinced. Commons leader Andrea Leadsom stepped down yesterday from her position in regard to May’s Brexit policy, not to mention several of the PM's own cabinet ministers that have already quit their positions. 

 

Will there be a second referendum?

One interesting point in the deal is the potential to vote on whether the UK should have another EU referendum. It seems unlikely, though, that it will get to that stage. Of course, many Labour MPs back the process or a second public vote, but May's deal isn't simply another referendum; it’s supporting a Tory deal that comes with a number of other conditions.

May's tenure as PM looks likely to end prematurely, and despite assurances claiming she will see out the Brexit process before leaving Downing Street, the pressure is building on Theresa May to leave office sooner. For this reason alone, it seems that the second referendum is more of a fantasy, added to try to win majority support in the House. In reality, the second referendum proposal is unlikely to come to fruition.

If, or more relevantly when, she does go, all plans or deals proposed will be redundant anyway as her successor will proceed with their own plans to resolve the EU departure.  


How have the markets reacted to the political turmoil?

Unsurprisingly, there’s been a lot of volatility and fluctuation over the last week, reminiscent of how the markets reacted during important Brexit progressions.

GBP/USD

GBP/USD has continued to fall, with the pound being hammered down by the dollar. At the beginning of the month, it reached a high of over 1.318, but has since fallen dramatically to a low of 1.260. It had spiked up on Tuesday following May’s announcement, as a new resolution to the Brexit deadlock was offered, but this was swiftly crushed back down.

Open price on 21 May: 1.27278
Period high: 1.28136
Period low: 1.26043
Current price (23 May, lunchtime): 1.26370

23 May GBPUSD

EUR/GBP

EUR/GBP saw a spike similar, yet smaller, to GBP/USD on Tuesday. That also crashed back down almost immediately, and it has continued to follow a very similar pattern as well. There’s almost a war on two fronts with this FX pair, as Brexit is affecting both the euro and the pound, and the political uncertainty regarding May’s position is also hindering the latter as well.

Open price on 21 May: 1.13960
Period high: 1.14616
Period low: 1.13124
Current price (23 May, lunchtime): 1.13577

23 may EURGBP

UK 100

The UK 100 showed much more resilience than the pound FX pairs. After a 50-point drop on Tuesday, it recovered back to close at just 10 points shy of the daily high. It pushed even higher on Wednesday, before another 50-point drop and subsequent recovery. It was down hill from there though, as the price closed down at 7314. Thursday morning was then an absolute horror-show as it plummeted just shy of 100 points.

Open price on 21 May: 7315.9
Period high: 7373.7
Period low: 7218.9
Current price (23 May, lunchtime): 7224.0

23 May FTSE

How will the markets react when Theresa May goes?

It could be argued that the markets have already ‘priced in’ Theresa May’s departure, but without knowing her successor, it’s difficult to interpret at this point how exactly the markets will perform once she’s gone. Is it the lack of confidence in the PM that has driven prices down or is it the heightening of uncertainty that is worrying investors?

GBP/USD

For cable, it is likely to be the uncertainty aspect that’s hindering the pound’s progression. When a fixed path is set for Brexit and uncertainty, be it constructive or destructive, is eased, the pound may be able to stage a recovery.

EUR/GBP

Alternatively, the future price of EUR/GBP may hinge more greatly on who will replace Theresa May and what their plans for Brexit will be. Were a Brexiteer to become PM, more definitive action may be implemented to ensure the UK leaves the EU.

Regardless of opinion on the European Union, in-parliamentary relations may also be crucial in driving this FX pair. It seems May has lost the backing of the House, a number of Tory MPs and even some of her cabinet, but a more popular PM may inspire a cross-party Brexit agreements that could strengthen EUR/GBP.

UK 100

An ideal situation for most UK companies would be a second referendum that overturns the initial ‘leave’ result and culminates in a revocation of Article 50. Failing that, firms are just looking for some clarity, so contingency plans can be implemented if necessary.

Any positive news will likely have a beneficial effect on the UK 100, simply as investor confidence in the index would improve. It’s impossible to tell how the FTSE will react, as so many different scenarios exist. However, it will continue to be highly reactive to any Brexit news. A definitive and positive outcome may cause the UK 100 to soar in price.  

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