Boris Johnson has now resigned. As the race for new Conservative leader commences, find out what could happen if an early election is called.
The economic outlook for the UK was pretty awful before the Tory party was plunged into chaos so it’s not the only factor at play: there’s a potential recession on the cards and a major war in Europe for the first time since World War II.
But as the UK is paralysed to do anything until the future of the government becomes clear, it’s worth looking at all the potential outcomes of Boris Johnson's resignation - including how a snap election would play out across financial markets.
What happens now that Boris Johnson has resigned?
Although Boris Johnson has resigned, there will not be an automatic general election to replace him. Instead, the Conservative Party would select its next leader through an internal leadership race. The law states that there must be always a Prime Minister, so Johnson would likely remain in the position until his successor is named.
Learn more about the Conservative Leadership race.
The last time this happened was when Theresa May stepped down in 2019 and Boris Johnson was elected party leader. Although a new party leader is under no obligation to call for an early election, Johnson did call a snap election within the year to gain a parliamentary majority – which he did.
Would a new Tory leader do the same? It’s unlikely, given that polls currently favour the Labour party to win the next general election, planned to take place on Thursday 2 May 2024.
In which case, there are only two ways that an early election would take place:
- A motion of no confidence is passed by a simple majority in the Government, and 14 days pass without a new Government receiving a confidence motion
- A motion for a general election is agreed by two-thirds of the Commons
How would an early election impact markets?
An early election at this stage would probably not be welcomed by markets. As a general rule, investors prefer elections that have a predictable outcome, regardless of the party.
The Labour Party is currently leading the polls with 40%, followed by the Conservatives at 33%, and the Lib Dems at 12%.
UK stock market
UK stocks and indices usually see short-term volatility around elections as domestic companies and London-listed international firms alike prepare for the change in policy.
Stock markets do also tend to prefer a Conservative government that will be more business focused. The Stock Market Almanac found that the FTSE All-Share only rose in three years when Labour won, compared to eight out of nine years the Conservatives won – delivering average returns of -5.8% and 10.8% respectively.
Currently, the Labour Party is leading the polls, largely due to the public’s disapproval of the current Tory government amid multiple scandals and questions over the Prime Minister’s integrity.
But once an election is over, there’s no evidence that the stock market performs differently under a Conservative government as it does a Labour government – as there are so many other factors at play other than the internal politics of Downing Street.
For the most part, the stock market will move in the same direction after an election as it was beforehand and in the year to date, the FTSE All-Share has fallen by 8.57% due to a culmination of recession fears and the Ukraine crisis.
As investors and traders seek to understand how new policies could impact the UK economy, there is likely to be movement in the pound – this is true whether there’s an election or just a change in leadership. Previous elections have seen price swings of up to 10 percentage points.
In the last election, the pound surged when exit polls predicted a huge Tory majority. This was largely as the result would end the political uncertainty surrounding the UK economy at the time – namely Brexit.
It’s likely that any future election’s impact on the pound would be similar, as the UK economy is in a more precarious position than it was three years ago.
GBP currency pairs are likely to see volatility, the most traded being GBP/USD and EUR/GBP.
Trading general elections
For traders, general elections – and political turmoil in general – can inject excitement into the markets. The volatility creates opportunities for going long and short on UK companies, GBP currency pairs and government bonds.
You can take a position on thousands of markets with City Index in just four steps.
- Open a City Index account, or log in if you’re already a customer
- Search for the asset you want to trade in our award-winning platform
- Choose your position and size, and your stop and limit levels
- Place the trade
Or you can try trading UK assets risk free by signing up for our demo trading account.
How to prepare for UK volatility
Whether an election is called or not, the UK can expect to see volatility over the coming months as the political instability adds to an already tense economic environment.
To best prepare yourself, you should:
- Keep up to date with the latest analysis – use our news and analysis from in-house experts and in-platform Reuters feed
- Set up market alerts – get notifications of key events and receive personalised price alerts via SMS, email or in-platform messages
- Manage your risk – ensure stops and limits are added to your positions to close your trades automatically at your predetermined levels of profit or loss