"The louder he talked of his honor, the faster we counted the spoons" , Ralph Waldo Emerso
Leaving all pro- or anti-Brexit leanings aside (and of course we never take any sides anyway), it's not often that we feel obliged to the now former UK Foreign Secretary Boris Johnson. We were saying yesterday how surprised we were that the resignation of Brexit Minister David Davis hadn't had a stronger negative effect on sterling. We also said that Prime Minister May still faced a sea of troubles in getting a Brexit deal, any one of which could scupper the plan and undermine the currency. Almost on cue, Boris then announces his own resignation and offers a stinging rebuke to the PM and her watered-down Brexit intentions. Sterling immediately dropped from a high of $1.3350 to $1.3210 (last at $1.3245), which seems a more realistic reflection of the UK's chaotic political scene just now.
Ralph Waldo Emerson died 82 years before Boris Johnson was even born, but his famous quote (see above) immediately sprang to mind when the latter was giving us his thoughts on resignation. One could argue that David Davis acted with a certain amount of honour, but the trouble with Boris (one of them, at least) is that he doesn't always create the same sort of impression. He has some dubious form in that regard -- just ask David Cameron -- and as Robert Shrimsley says in "May now faces the second Battle of Brexit", Opinion in the Financial Times, "he has managed to make a principled decision look unprincipled".
Now strictly speaking this kind of thing should not be part of our brief ..... except that Mr Johnson's departure widens the possibilities of where this all might end, and what it means for UK assets. He certainly won't be missed at the Foreign Office, where his tenure has been little short of disastrous. (Quelle surprise ! Boris in charge of the Diplomatic Corps ? What did they expect ?) . But the way is now open for him to have another shot at the leadership of the Conservative party should he choose to do so, which would most likely bring with it the prospect of the Tory party tearing itself apart over Europe (again) and yet another General Election.
Actually, the effect on UK assets although more realistic is still comparatively muted ..... which is largely a function of the belief that, like it or loathe it, the UK is likely to end up with a softer, more market-friendly Brexit now that the leading malcontents are out of the cabinet. That's certainly one possibility, but assumes that Mrs May will remain in charge of a party that will support her and her soft Brexit policy in large enough numbers. That, in our opinion, is a long way from guaranteed. It may well be that UK assets at current levels turn out to have been underpriced, but it would take a brave or foolhardy investor to ignore the huge dangers looming larger than ever.
It may seem barely credible but in modern politics the world over what had once seemed barely credible is becoming almost commonplace. The UK's alternative to a Conservative government would a Labour government ..... that is to say, power devolving to a far-left Labour party led by Jeremy Corbyn with a Chancellor of the Exchequer (John McDonnell) whose attempts to distance himself from the Marxist leanings of his past are not always totally convincing. From an investor point of view, and strictly from an investor point of view, any increase in the chances of a Labour victory should there be an election would set off an alarm signal of some sort (a red flag, perhaps ?). It's still a long shot, but as far as UK assets are concerned we can't see any reason to be anything other than extremely defensive.
And just quickly , Turkey ..... once again we spoke the other day of our surprise at the good, then bad, and ultimately indifferent reception the markets gave to President Erdogan's sweeping election victories (presidential and parliamentary). Well, they reacted yesterday .... At one point yesterday morning , the Turkish lira was trading at TRY 4.5160 to the US dollar. By late US trading, it had fallen in value to within a whisker of TRY 4.75 (last at TRY 4.73). The trigger for the precipitous fall ? The dismissal of just about the last remaining member of his cabinet respected by the markets, Finance Minister Mehmet Simsek.
What's more, the President replaced Mr Simsek with his own son-in-law Berat Albayrak , an MP for three years and a man whose experience for his new role is a little thin, shall we say ? In a wider reshuffle Mr Erdogan has reduced the number of Ministries (and Ministers) and the whole exercise is pretty plainly one to put "yes-men" in place, so-called "rubber-stampers". In another move, he gave himself power to directly appoint the governor of the central bank and one by one possible obstacles to the President taking an increasingly firm hold on monetary policy are being removed.
Given Mr Erdogan's truly bizarre views in that area, that's a big, big worry. A pathological hatred of high interest rates, even if raging inflation demands them, and a commitment to more fiscal stimulus in pursuit of growth just when the overheated economy requires restraint, is a recipe for even bigger current account deficits and even more inflation. And that, of course, is very bad news for the currency which reacted accordingly. If the hope is that adverse market reactions might induce a change of thinking on behalf of Mr Erdogan, one can only say that so far the evidence suggests that it's not working ....