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UK Comment: The Chancellor Departs

What are we talking about? Kwasi Kwarteng has been sacked as Chancellor, a consequence of the failed mini-budget.

Does it matter? Probably not much, and certainly not compared to an actual change in policy. It seems likely that the key policies from that announcement will get cancelled or watered-down – the result of a potent alliance between, most importantly, the bond market, Conservative MPs and the Bank of England. That policy U-turn would be significant and, while politically embarrassing, would probably help stabilise UK financial markets – at least compared to where they’ve been over the past couple of weeks.

You might argue that Kwartengs departure is a way to try to save some parts of the package, but that seems a bit of a stretch. Most likely, those in favour of the mini-budget will retreat, regroup and try again at some point in the future – if they stay in government long enough.

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The other interesting question surrounds the Bank of England. When the Governor told pension funds that there would be no extension to the Banks purchase programme after October 14th, who was he talking to? Pension funds? The government? Most likely, to both.

Where does this get us? Kwartengs departure means little without a U-turn on policy, and we’re likely to see that over the coming days. If we do, it’ll most likely help stabilise UK financial markets. But there’s also likely to be some residual damage and we’ll see it in things like mortgage rates. And even if we do see a recovery in UK assets, the political environment remains very uncertain, and that’s a risk investors will want to be paid to take.

As for portfolios, the global environment remains challenging so you’d expect volatility to stay high – particularly as the Bank of England finishes its bond-buying programme today (Friday). But UK assets look cheaper than they did, and from a long-term perspective we think that matters the most. Hopefully the incoming Chancellor, Jeremy Hunt, can achieve better alignment between the government, the Bank of England and the bond market than we’ve had over the past few weeks.

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