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A traders' guide on the UK Tory leadership battle

Chris Weston
Head of Research
Oct 21, 2022

The link between politics and financial markets is always fascinating viewing, often leading to headline-driven markets and increased intraday volatility. This coming week this dynamic will been seen full force and will be a major theme for FX and equity index CFD traders.

Let the battle for the new PM commence

On Monday at 2 pm, all 357 Tory MPs have a chance to vote for their preferred PM candidate. The threshold to get on the ballet is a lofty 100 votes – a very high hurdle rate by historical standards, purposely designed to get to three candidates and to ensure a quick result.

On the same day, there will be another vote by MPs, and we should be left with just 2 candidates.

MPs will then be asked for their vote to offer an indicative position and provided there isn’t a landslide on the cards, the full Tory membership (there are over 170k members) will come into play and be asked to cast an electronic vote on Friday to decide who leads the Conservative party.

There will be a process of assigning the cabinet and all eyes fall on whether Jeremey Hunt continues as Chancellor.

The runners and riders

Rishi Sunak is the clear favourite according to betting markets and he will feel confident of once again picking up the most votes, at least from the MPs. Penny Mordaunt and Ben Wallace will fancy their chances, but their count depends on Boris Johnson, fresh from his Caribbean holiday, and his share of the 357 votes.

Could we be realistically facing a Sunak vs Johnson tussle??

This seems an elevated scenario and to the neutrals, this is a mouth-watering proposition – there is so much bad blood between the two and if there were to be a live public debate then it would have been champagne TV.

While Sunak would feel a sense of schadenfreude from economic predictions of the Truss stimulus, he is by no means home and dry. A recent YouGov poll of 530 Tory members showed that 32% of respondents thought Boris Johnson would be preferred PM, with Sunak commanding a 23% share. Therefore, provided Boris Johnson gets the 100 MP votes, he’d be quietly confident of regaining his position as PM and taking the Conservative party to the General Election by 2025.

How to trade the news flow?

Perhaps the most important factor is whether the new fiscal statement is handed down as scheduled on 31 October, with the OBR forecasts also due. The market is bracing itself for significant spending cuts and higher taxes to balance the UK’s finances – subsequently, if there is any doubt around Hunt’s role as Chancellor and the ability to hand down a frugal and austere plan, then we could easily see increased GBP volatility.

The shock factor - All candidates will not want to rock the boat too greatly – they are now only acutely aware of the power the capital markets wield if they don’t like what they hear.

Also consider how the leadership process and budget shapes expectations for the 3 November BoE meeting - a smooth transfer of power and an uneventful budget could see the market swing to a consensus view that the BoE hike by 75bp hike – which could weigh on the GBP, certainly vs the EUR and CAD.

That’s a big ‘if’ of course, as these things are rarely smooth!

With a big week ahead for GBP traders, what’s your position?

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