UK reaction - Government resignations threaten Brexiteer challenge


David Page, Senior Economist at AXA IM, comments on UK Government resignations

  • Foreign Secretary Johnson added to the list of resigning cabinet ministers after Friday’s Chequers meeting sets out new government position.
  • Position of remaining Brexiteers important to gauge threat to government.
  • Former Chairman Schapps urges no time for a leadership challenge.
  • Financial markets react to heightened political uncertainty.

On Friday, PM Theresa May gathered the cabinet to Chequers to effectively impose a new exit strategy for the UK. While a full White Paper will only be released on Thursday, the government has stated that this strategy would pursue the “facilitated customs arrangement”, where the UK collects EU tariffs on its behalf, but can charge lower tariffs for those goods destined for the UK. In addition, it would agree common regulations on goods and agricultural products, but “only those necessary to provide for frictionless trade at the border” (although a priori we would consider this to be all goods). It also discussed “due regard to EU case law in areas where the UK continued to apply a common rulebook”. This is a softer version of Brexit than the government has until now suggested, as we suggested necessary to address the Ireland border situation.

In reaction to Friday’s meeting, Brexit minister David Davis resigned on Sunday. He was asked if this new strategy was really one to leave the EU? He replied “I don’t think so”. He added that this was a time to get tough with EU negotiations, not concede more. He has been replaced as Brexit minister by Dominic Raab – a leave campaigner and former chief of staff to Mr Davis. Junior Minister Steve Baker also resigned. However, today, and thirty minutes before the Prime Minster was due to address Parliament, Foreign Secretary Boris Johnson resigned. The resignations so far threaten a tipping point for Brexiteers that could lead to a leadership challenge.

We have maintained since January that an uneasy alliance of political interests would keep the UK government going until Brexit was finalised in March 2019. At that point, we believed that Brexiteer’s power would rise, with no going back on the UK’s decision to leave the EU. The resignations over the past two days question whether Brexiteers believe they have the numbers to take control of the government themselves? Or whether this is a reaction by a number of high-profile ministers who now want distance themselves from these negotiations. Much will depend on remaining high profile Brexiteer ministers, including new Brexit Minister Raab, and influential back-benchers. Grant Schapps, former Conservative Chairman, stated now was not the time for a leadership challenge. But the risks of a summer of political crisis have certainly increased over the past few days.

Financial markets have reacted to the news of Johnson’s resignation and the uncertainty of further political uncertainty. 2-year and 10-year yields fell back by 4bps and 3bps respectively to 0.73% and 1.28%. Sterling also retreated by 0.5% to the euro and 0.7% to the dollar. While the probability inferred from overnight interest swap markets for an August Ban Rate hike dipped to 73% from 80% last week. These movements are illustrative of the direction we would expect for UK asset markets if political uncertainty rises further over the coming days.

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