The “Boris bounce” is well and truly over.
The COVID-19 pandemic is sweeping all before it, including asset price valuations and the health of key government figures.
The UK’s Prime Minister Boris Johnson was first struck down by the virus on March 27 2020, with most of his entourage expecting Britain’s enigma to recover within a week or two. However, on Monday this week, the Prime Minister’s office stated that Johnson was admitted to intensive care with his duties to be delegated to other cabinet members.
At Monday’s press conference, the UK foreign secretary, Dominic Raab, said Boris Johnson was in “good spirits” but just an hour later, Britain’s top government official was admitted to intensive care. There were additional reports – immediately denied by government officials – that Johnson was also on a ventilator to support his breathing.
Johnson’s right-hand man, Dominic Cummings, the man who has been described as a “spin doctor” and a public relations specialist is also in isolation having been diagnosed with COVID-19 in recent days.
With Johnson and his top aide side-lined, responsibilities for the functioning of the UK government have been passed to current foreign secretary Dominic Raab – a man without top-tier political experience in a historically significant health crisis that knows no bounds.
The turn of events sent shockwaves across the entire world with other politicians and entertainment glitterati offering words of support. However, Johnson’s hospitalisation creates a political and social impact, but not an economic one.
The FTSE 100, an index of the UK’s largest companies recorded one of its best days on Monday since the pandemic began and is up over 7% so far this week. Meanwhile, the British pound is also stable and even appreciating against all other major currencies including the US dollar so far this week. After trading down to $1.2200 against the dollar on Monday, Sterling has appreciated to as high as $1.2375 by Tuesday evening.
Why the lack of a negative market impact in Britain?
The simple answer is that currency flows, especially the glacial movements done by institutions, banks and governments are affected by economics, rather than politics.
Changes in leadership at the top echelons of government rarely incur significant changes on currency valuations because any policies that could potentially affect Sterling are telegraphed in advance with market participants in full awareness of likely eventualities. As traders would say, things are quickly priced in so any adjustments can only be noticed in hindsight, if at all. Also, it is assumed that all cabinet members are all responsible professionals that act on expert advice from behind the scenes, therefore, most market participants expect Dominic Raab (or any cabinet member for that matter) to be a decent stand-in.
In crisis situations, a change of leadership would only affect currencies if there is a perceived negative impact on the UK as an economy. So, although Johnson’s hospitalisation may be shocking from a humanitarian, social and political perspectives, concerning economics, very little has changed.
The UK is facing the worst downturn in its history with unemployment rates expected to hit 25-50% in the next few months. It will now be up to Raab to take the reins, which could potentially cause economic ripples if his decisions are out of kilter with what the markets are expecting.
Moreover, the UK economy is far more influenced by the Bank of England and the UK’s captains of industry and its top five banks than it is by prime ministers or civil servants.
What happens next is incredibly uncertain because the UK is approaching the apex of its infectious cases curve – a time when correct decisions and strong leadership is needed most. Critics have pointed out that Mr Raab is inheriting an arrangement that is “murky and “potentially unstable”.
According to a statement from the UK government, Dominic Raab has been asked by the prime minister to deputise for him “where necessary”, however, by making Raab first secretary of state in the government, Johnson has effectively put the entire chain of command into a grey area. Britain’s unwritten constitution offers no guidance on the scope of what powers Raab actually has, or how the broader cabinet should proceed if the prime minister is absent for a lengthy period.
This is particularly pressing considering that the UK may soon be implementing some of the most draconian measures in its history, including forcible detention of people suspected of being infectious, forcibly obtaining “biological samples”, extending lockdown measures, cancelling inquests into coronavirus-linked deaths, abolishing juries in courts and cremations without the authorisation of family members.
The alarming deterioration in Johnson’s condition, not even 2 weeks since testing positive for COVID-19, is likely to serve as a stark reminder that the pandemic will continue to deliver social, political and economic shocks for some time yet.
Furthermore, the lack of clarity over who ultimately leads the government could yet puncture the UK’s economic position, especially if matters deteriorate and decisions become harder to justify to a growingly impatient population and to dissenting cabinet members.
If such a scenario occurs and conditions deteriorate to the point of looting and rioting (as an extreme example), then Sterling is likely to feel the brunt of investors’ displeasure.
The overwhelming mandate Johnson secured in last December’s election was largely down to his personality and ability to cajole the public. His pledge to succeed where others had previously failed was widely accepted which thereby gave him legitimacy and the ability to push through unsavoury policies as a result of COVID-19.
With Johnson now in intensive care, his personable authority will be extremely difficult for Raab to replicate. So although Sterling has been left untarnished, that could well change in the next few weeks.