Britain’s stock market recovered today after its worst single-day fall in three weeks – despite investors bracing for months of political uncertainty and questions over Boris Johnson’s survival.
The benchmark FTSE 100 index rallied in early trading in London this morning as it opened up by 1.44 per cent or 101 points to 7,127 points.
The bounceback followed a 2.9 per cent fall yesterday which saw the blue-chip index close at its lowest level in a fortnight since June 24 after a major drop in commodity prices hit some of its biggest companies.
It comes as the Prime Minister tries to save his premiership after Rishi Sunak quit as chancellor – replaced by Nadhim Zahawi – and Sajid Javid resign as health secretary.
Some investors appeared to be buoyed by hopes that the mounting political crisis will lead to a softening of the Government’s tough stance on fiscal spending.
FTSE 100 PAST 24 HOURS: This graph shows how the index dropped yesterday but has bounced back this morning (far right). It opened up by 1.44 per cent or 101 points to 7,127
FTSE 100 PAST TWO YEARS: This graph shows how the FTSE plunged at the start of the pandemic (far left) but has gradually regained lost ground before falling again in recent weeks
Sajid Javid, Boris Johnson and Rishi Sunak, together at a press conference last September
Jordan Rochester, a currency strategist at Nomura Securities in London, said: ‘The new leader will want to win over voters and the Tory party – so perhaps down the line we see fiscal subsidies for energy and tax cuts to win over the Tory faithful.
‘But first you need an actual winner of a leadership contest this can take roughly up to six to eight weeks or so… then after that we wait for the decisions by a new chancellor.’
Meanwhile investors expect little respite in the near term for sterling, which is at a two-year low versus the dollar.
Chris Weston, head of research at Melbourne-based brokerage Pepperstone, said today: ‘I think this news is not a shock to a lot of people. Everyone’s sort of doing the rounds and looking at who could potentially come in.
‘The price action that we’re seeing in the pound is very thematic of a market that believes we’re going to see policy continuation.’
Britain’s new Chancellor Nadhim Zahawi arrives for TV interviews in London this morning
Aside from any change in leadership, investors are also having to consider rising prices, the record current account deficit and the risk of recession.
New Chancellor Nadhim Zahawi must battle rising prices and calls for tax cuts
Nadhim Zahawi inherits a raft of cost-of-living problems following the resignation of Rishi Sunak as chancellor.
In recent days, Boris Johnson has sought to shift the focus onto the economy rather than the row surrounding his former deputy chief whip Chris Pincher.
It now falls to Mr Zahawi to deliver on his leader’s promise to ‘help people through the current difficult times’.
There are mounting fears the cost-of-living crisis could tip the UK into recession, as defined by two quarters in a row of falling output, as rocketing inflation sees households and businesses rein in spending.
Inflation has already reached a 40-year-high of 9.1 per cent and is set to rise past 11 per cent in the autumn.
Former Tory Cabinet minister John Redwood said: ‘The last chancellor said he believed in low taxes but he kept putting them up. Can the new chancellor cheer us up and avoid recession by actually cutting tax?’
Bank of England Governor Andrew Bailey last Wednesday said soaring inflation will hit Britain harder than any other major economy during the current energy crisis and that output is likely to weaken earlier and be more intense than others.
Speaking at a press conference at the close of the Nato summit in Madrid, the PM denied his Government was being ‘complacent’ about spiralling inflation and added that the ‘cost of freedom’ is ‘always worth paying’ amid soaring costs exacerbated by the Ukraine war.
Mr Johnson was asked at the press conference about his repeated promise to bring down tax rates, after new HM Revenue and Customs figures showed that some 6.1 million taxpayers are projected to be paying income tax rates at the higher rate of 40% or the additional rate of 45% in 2022/23.
He pointed to the national insurance threshold being increased as an example of reducing burdens in a ‘sensible and responsible way’.
The Prime Minister has highlighted the change in the national insurance threshold, which came into effect today, as the ‘single biggest tax cut in a decade’.
The measures sees the point at which people start paying national insurance rise to £12,570, partly offsetting the increase in the rate of the tax previously announced to help fund health and social care measures.
The Government says the move will save an average employee around £330 a year, with 30million people set to benefit.
More than eight million households will start to see cost-of-living payments hit their bank accounts on July 14.
From that date, a first instalment of £326 will start to be paid out to low-income households on benefits, the Department for Work and Pensions (DWP) previously announced.
The second portion of the one-off £650 payment will follow this autumn.
Pensioner households are also set to receive an extra £300 to help cover the rising cost of energy this winter, while people on disability benefits will receive an extra £150 payment in September.
From October, households will have £400 taken off energy bills.
The outgoing boss of Britain’s largest business group is just one figure to demand further tax cuts to soften the economic reality.
The head of the Confederation of British Industry (CBI) Lord Bilimoria last month called for a reduction in VAT, saying it was ‘absolutely wrong’ to have the ‘highest tax burden in 70 years’.
Downing Street was forced in June to defend reinstating the triple lock on pensions while insisting that public sector workers receiving pay rises in line with inflation would further stoke rising costs.
Retirees are set to see double-digit payments increases next year as the state pension will be determined based on September’s CPI inflation.
However, No 10 insisted that ‘chasing inflation’ with pay rises for public sector workers was not ‘feasible’ as it would further fuel inflationary pressures.
There have been calls for the Government to take further action after motorists were hit by a record monthly hike in petrol prices in June.
Average fuel prices have increased by around 27p per litre for petrol and 21p per litre for diesel since Mr Sunak implemented a 5p cut in duty in March.
RAC fuel spokesman Simon Williams said: ‘The silence from the Treasury when it comes to supporting drivers through this time of record high pump prices is, frankly, deafening.
‘Perhaps it has something do with the fact that it’s benefiting significantly from the increased VAT revenue caused by the high prices.
‘We badly need the Government to go beyond just vague words and instead actually implement a clear package of financial support to show they’re on the side of drivers.’
Mr Sunak said late last month he would take ‘under advisement’ the recommendations of Tory MPs to go further with cutting fuel duty, a move which the PM has been non-committal about when recently asked.
Mr Zahawi’s predecessor was warned imposing a windfall tax on profits from oil and gas giants could damage investment in the North Sea.
Mr Sunak in May unveiled the measure which places a 25 per cent surcharge on the industry’s profits, with it hoped the policy will raise as much as £5billion.
Offshore Energy UK chief executive Deirdre Michie said in June: ‘We will work constructively with the UK Government and do our best to mitigate the damage this tax will cause, but if energy companies reduce investment in UK waters, then they will produce less oil and gas. That means they will eventually be paying less taxes and have less money to invest in low carbon energy.’
Russian President Vladimir Putin’s blockade of grain exports from Ukraine threatens to push hunger up further in the UK and around the world.
Mr Johnson on June 23 pledged £372million in aid to alleviate shortages, but the situation remains problematic at home.
Research published earlier in June signalled that the number of people in the UK using a food bank has jumped from one in 10 to nearly one in six since last year.
And the school food caterers’ association Laca has warned the quality of school meals will get worse if funding is not ring-fenced by the Government.
Children and families minister Will Quince on Monday said he would speak with then education secretary Mr Zahawi, who was in turn to speak with the Treasury about how to better support schools and families.
The Bank of England has raised interest rates five times since December but traders have scaled back expectations for further tightening this year on worries a higher cost of borrowing would further hurt the economy.
Brexit tensions, namely the escalating row over Northern Ireland’s status that threatens to upend British trade ties with the European Union, have also hurt sterling.
After touching $1.1899 overnight, the currency steadied at $1.1964 in Asia. It is down nearly 12 per cent this year.
The BoE’s trade-weighted sterling index, which measures the pound against a basket of currencies, fell on Monday to its lowest since January last year.
And the FTSE 100 index closed at its lowest level since June 24 yesterday, after its biggest single day fall since mid-June.
But the index, dominated by healthcare, mining and banking stocks, is only down by 4.8 per cent this year – which is far less than the US S&P 500’s drop of nearly 20 per cent.
Axel Merk, president and chief investment officer of Merk Investments in Palo Alto, California, said: ‘Are things going to change if we get a new government?
‘Are the problems going to be solved if the prime minister gets replaced? It’s a lot of local drama.’
Yesterday, a pair of Cabinet resignations and a series of Government exits threatened to force Mr Johnson from Number 10.
Mr Sunak and Mr Javid’s resignations came just as the Prime Minister was being forced into a humiliating apology to address the row over scandal-hit former deputy chief whip Chris Pincher.
The pair were swiftly replaced last night, with Mr Zahawi promoted to be the new Chancellor and Steve Barclay becoming Health Secretary.
Mr Zahawi said today that he is going to ‘look at everything’ when asked about his tax plans. The new Chancellor added that ‘nothing’s off the table’ when pressed on his vision for corporation tax.
Asked what immediate plans he had made with the Prime Minister when it came to cutting taxes and tackling inflation, he told Sky News: ‘As my first day in the job, the conversation we had is my task is to rebuild the economy and to grow the economy.
‘I will look at everything to make sure that we continue to be on the side of people.’
Pressed on his plans for corporation tax specifically, he said: ‘I will look at everything. There’s nothing off the table. I want to be one of the most competitive countries in the world for investment.
‘I know that boards around the world, when they make investment decisions, they’re long-term, and the one tax they can compare globally is corporation tax. I want to make sure that we are as competitive as we can be whilst maintaining fiscal discipline.’
Mr Zahawi also said that the reason he has taken the job is he believes the team in Government will ‘deliver’, adding ‘there are no easy answers’.
He told Sky News: ‘You don’t go into this job to have an easy life. You make some tough decisions every day. Sometimes it’s easy to walk away but actually it’s much tougher to deliver for the country.’
Mr Zahawi, who was promoted from his education secretary role following the resignation of Mr Sunak, said: ‘You’re asking me a question about why I’m doing this job.
‘I’m doing it because I think the team that is in Government today is the team that will deliver, that will deliver today a tax cut for 30 million people, £330 today, as we’ve moved the threshold of national insurance.’
He added: ‘There’s some big challenges facing us. I want to make sure we deal with those challenges.’
Mr Sunak and Mr Javid, both potential leadership rivals, offered sharp criticisms of Mr Johnson in their resignation letters.
Mr Sunak said ‘the public rightly expect government to be conducted properly, competently and seriously’, adding: ‘I believe these standards are worth fighting for and that is why I am resigning.’
Mr Javid said the British people ‘expect integrity from their government’ but voters now believed Mr Johnson’s administration was neither competent nor ‘acting in the national interest’.
Tory former Brexit minister Lord David Frost supported their resignations, noting they had done so after he similarly stepped down in December.
‘Other Cabinet ministers now need to consider whether they are truly happy with the current direction of travel’, Lord Frost wrote in the Telegraph, adding that Mr Johnson should quit his post or risk ‘taking the party and the Government down with him’.
The controversy stemming from the resignation of Mr Pincher had engulfed Downing Street in recent days, as the Prime Minister faced questions about how much he knew of the allegations and rumours surrounding the Tory MP before he was appointed as deputy chief whip.
Mr Pincher quit as deputy chief whip last week following claims that he groped two men at the upmarket Carlton Club, but Mr Johnson knew about allegations against him as far back as 2019.
The Prime Minister acknowledged he should have sacked Mr Pincher when he was found to have behaved inappropriately when he was a Foreign Office minister in 2019, but instead Mr Johnson went on to appoint him to other government roles.
Asked if that was an error, Mr Johnson said: ‘I think it was a mistake and I apologise for it. In hindsight it was the wrong thing to do.
‘I apologise to everybody who has been badly affected by it. I want to make absolutely clear that there’s no place in this Government for anybody who is predatory or who abuses their position of power.’
MPs were told that Mr Johnson had not recalled being told about the earlier 2019 allegations.
Deputy Prime Minister Dominic Raab, the then foreign secretary, gave Mr Pincher a dressing down over his ‘inappropriate’ conduct ‘in no uncertain terms’ at the time and the Cabinet Office’s propriety and ethics team was also involved.
No 10 had initially claimed Mr Johnson had not been aware of any ‘specific allegations’, after Mr Pincher’s dramatic resignation.
By Monday that line had evolved to acknowledge the Prime Minister was aware of ‘allegations that were either resolved or did not progress to a formal complaint’.
This latest row followed closely on a number of other setbacks for the Prime Minister.
His authority had already been damaged by a confidence vote which saw 41 per cent of his own MPs withdraw their support.
The loss of crunch by-elections in Tiverton and Honiton and Wakefield in June triggered the resignation of party chairman Oliver Dowden, while there is still lingering anger over coronavirus lockdown-busting parties in Downing Street.
Mr Johnson still retains the support of several Cabinet ministers including Dominic Raab, Liz Truss, Michael Gove, Therese Coffey and Ben Wallace, with universities minister Michelle Donelan now taking on the education portfolio.
Yet the hours after Mr Sunak and Mr Javid quit brought further resignations from Government.
Bim Afolami quit as Tory vice-chair live on TV, Theo Clarke and Andrew Murrison resigned as trade envoys and ministerial aides Jonathan Gullis, Saqib Bhatti, Nicola Richards and Virginia Crosbie left their roles.
An employee views a FTSE share index board at the London Stock Exchange (file picture)
Solicitor General Alex Chalk also quit last night.
The Prime Minister’s fate may ultimately lie with backbench MPs if the Tory 1922 Committee’s rules are changed to allow another confidence vote within 12 months.
Allies of Mr Johnson believe that is unlikely as it would leave any future leader with a ‘gun to their head’.
More immediately, Mr Johnson will endure a grilling from MPs on all sides of the House today at Prime Minister’s Questions, while later he will be interrogated by the Commons Liaison Committee.
Germany’s share price index DAX graph is seen at the stock exchange in Frankfurt yesterday
That is likely to be a particularly brutal grilling, with the committee, chaired by Sir Bernard Jenkin, peopled with a host of Tory MPs far from sympathetic to his leadership.
Ministers loyal to Mr Johnson, who will need to re-shuffle various Government roles following the resignations, had rallied round him following the resignations last night.
Culture Secretary Nadine Dorries said he ‘consistently gets all the big decisions right’, while Brexit Opportunities Minister Jacob Rees-Mogg said the mandate won at the 2019 general election ‘should not be taken away from him because a number of people resign’.
A screen displays a chart with the IBEX 35 index at Madrid’s Stock Exchange Market yesterday
Mr Rees-Mogg, who spoke to Mr Johnson last night, said he remained ‘unflappable’.
It remains to be seen if Mr Johnson, who has established a reputation for escaping controversy, will survive the coming weeks.
Seven in 10 Britons say Boris Johnson should resign, according to a snap YouGov poll of more than 3,000 people, while the Times newspaper used an editorial to call on Mr Johnson to go.
‘Every day that he remains deepens the sense of chaos. For the good of the country, he should go,’ it said.