Johnson’s Final Days in 10 Downing Street?

Editors’ Note: MarketMinder favors no political party nor any politician. We assess political developments for their potential economic and market impact only.

UK Prime Minister Boris Johnson is under fire. Again. This time, cabinet ministers, backbench Members of Parliament (MPs) and the general public are revolted by revelations that Johnson had given an MP a senior government position despite knowing of outstanding allegations of abuse against him—and then claimed to have no prior knowledge of said allegations once they became public. As always, we will stay above the socio-political fray, as we are here to discuss only how politics intersect with markets and the economy—and this latest scandal looks increasingly likely to force Johnson out of office. Moreover, whether he stays or goes, it looks like the Conservative Party’s recent economic policy suite may get an overhaul. That is placing a hefty dose of political uncertainty over UK stocks, which could roil sentiment for the time being—but creates room for falling uncertainty to be a tailwind as this situation resolves.

Last time Johnson was at risk of an ouster, he won a confidence vote from his party’s committee of backbench MPs, known as the 1922 Committee. Under the committee’s current rules, MPs aren’t allowed to bring another no-confidence motion against him for a year. But that was then. Now, more than 40 MPs (and counting) have resigned from Johnson’s government since Tuesday, including Chancellor Rishi Sunak and Health Secretary Sajid Javid. Home Secretary Priti Patel reportedly joined the rebellion Tuesday night and told Johnson to step down, but as we write, it is unclear whether she formally resigned. Former Brexit ally Michael Gove, who had been serving as Secretary of State for Levelling Up—basically the guy in charge of European-style industrial policy—got fired before he could resign, and a parade of MPs and ministers filed through 10 Downing Street urging Johnson to stand down. But by 10 PM, only Larry the Cat had made an appearance on the steps, and Downing Street staff told reporters their boss had no plans to go.

We half hesitated to write this article now since so much is up in the air—but that is also sort of the point, because stocks don’t like high and rising uncertainty. UK stocks had a very, very bad day Tuesday, falling -4.3% in USD and -2.7% in GBP, and a modest rise on Wednesday didn’t erase the damage.^[i] Given most of today’s theatrics happened after market close in London, it wouldn’t surprise us if the volatility continued as markets digested the rapidly changing events—and the fireworks that seem set to follow this week, whatever they look like.

It isn’t clear that Johnson can hold out much longer. Several outlets report he is trying to save his hide by calling a snap election, arguing it would be rational to do so if MPs and the cabinet don’t respect what he claimed was a personal mandate from voters in 2019. That is a rather curious sentiment considering the UK is a constitutional monarchy with a parliamentary democracy—rather than a republic with a presidency—which is perhaps why many observers are skeptical that the Queen would allow a snap vote. It also seems like a bizarre tactic for Johnson to pursue considering recent polls show he would stand a high likelihood of losing his own seat, not to mention his party’s big majority, if voters went to the polls now.^[ii] But we guess anything is possible.

In the meantime, it isn’t clear what “hanging on” will look like. Initially, Johnson tapped Education Secretary Nadhim Zahawi to replace Sunak at the Treasury. The move was widely seen as an excellent choice on Johnson’s part, considering Zahawi’s strong free-market credentials and wide admiration from colleagues, but it also was a curious move for Zahawi given his own prime ministerial ambitions and the obvious political optics of accepting Johnson’s offer. Initially he took the reins with gusto, talking of tax cuts and fueling speculation that the government would cancel Sunak’s planned Energy windfall profits tax, which hasn’t yet become law. But the situation took a full 180-degree turn Wednesday, as Downing Street first briefed that Zahawi and Johnson would make a joint speech outlining a new economic policy platform Thursday morning—then announced it would be delayed to next week. While that schedule update made the rounds, Zahawi reportedly joined the delegation of ministers telling Johnson to resign, potentially completing the fastest political U-turn of all time.

So it is entirely possible that, if you are reading this with your coffee Thursday morning, Johnson is out and half his former cabinet have tossed their hats in the ring to replace him. Mooted contenders include Zahawi, Sunak, Javid and several others. Attorney General Suella Braverman has already announced her candidacy. It is also possible that, if the handful of loyal ministers are correct, he will be getting on with the job and lining up yet another reshuffle (if he can find anyone to replace those who resigned or got the axe Wednesday). If it is the former, get ready for weeks of uncertainty—first as the party votes on a leader, then as Labour leader Keir Starmer inevitably calls for that leader to call an election (which Starmer believes he will win). If it is the latter, get ready for a lot of talk and very little actually happening as gridlock sets in. As noted earlier, that probably kills the windfall tax, which would likely be a beneficial course correction for the UK economy and markets. But it would also potentially put tax cuts out of reach, presuming Zahawi sticks around and tries to push them—another unknown.

However it plays out, though, political uncertainty is unlikely to get much higher than it is now in Britain. Therefore, as clarity arrives gradually, it should help ease the tensions facing UK stocks. Easing political fears might not help the other headwinds currently roiling sentiment, including the cost of living and recession chatter, but one less concern is one less concern—a positive, if only a modest one.