Theresa May’s Resignation & What It Means For The Markets?

Theresa May announced that she will step down on the 7th June. She will remain in office until a new Tory leader is found, which is expected to take around 6 weeks. By the end of July, the UK should have a new Prime Minister and possibly a new direction for Brexit.

The next prime minister is likely to be pro-Brexit, with hard line Brexiter Boris Johnson the bookies favourite to take the reins. Theresa May's resignation was not unexpected, and the fact that we didn't see a sharp selloff in the pound confirms that. The pound spiked higher piercing $1.27 before paring some gains this afternoon. However, a positive close still looks possible, meaning the pound could end its record-breaking losing run. The markets dislike uncertainty.

Pound traders have been bracing themselves for a pro-Brexit leader over the past few weeks, sending the pound tumbling. With a pro- Brexit leader in power, the chances of a hard, no deal Brexit will increase significantly.

For the pound?

Up until a few weeks ago, pound traders had been pricing a softer Brexit deal pushed through (eventually) by Theresa May. This option has now been wiped off the table. The markets will now want to wait to see firstly who wins the leadership contest and secondly how they intend to address the unresolved Brexit question. Let's not forget that whilst Britain will have a new Prime Minister, the Brexit problems remain the same.

After heavy falls across the past two weeks, we expect the pound to consolidate at these levels until the next steps for Brexit become clear. Boris Johnson has been waiting in the wings for some time for this moment. Should he win the leadership contest and demonstrate that he is willing to peruse a no deal Brexit, the pound could take another step lower, potentially testing 2016 lows around $1.20.

And the FTSE?

The FTSE's reaction has been minimal to Theresa May's resignation. With around 70% of the FTSE made up by international firms the US – Sino trade dispute developments have had more of an impact driving the index higher.

Within the FTSE there are certain sectors which are more vulnerable to Brexit and domestic political changes. Stocks exposed to the UK economy, such as house-builders, UK domestic banks RBS and Lloyds, retailers and airlines which could be grounded in the case of a no deal Brexit, are keeping their head above water today. These are stocks which could tumble should Boris Johnson come to power and re position the UK towards the hardest of Brexits. The more domestically focused FTSE 250 is also up 0.6%.