2022 Conservative Party leadership election: What’s at stake for the FTSE?

Earlier this week, we discussed the political backdrop, candidates, and expected policies for traders to watch around next month’s UK Conservative Party leadership election (see “2022 Conservative Party leadership election: Who will be the UK’s next PM?” for more). Now, we wanted to examine how a victory by either candidate could influence the FTSE 100 index (UK 100).

Why the UK PM election may NOT lead to big moves in the FTSE

Before we get too deep, it’s important to note that traders generally overestimate the impact of politics on markets; after all, politicians often have to “water down” their proposals to get them passed through the rest of the government apparatus and the majority of factors that drive markets on a day-to-day basis sit well outside the realm of politics. Factors like international trade, monetary policy, supply chains, business confidence, and the complex interactions of millions of traders across the globe tend to have a bigger influence on markets than any individual politician’s policies, even if that politician is the Prime Minister!

The other reason asset prices tend to see less movement around elections than many traders expect is that markets are always forward looking. In other words, traders don’t wait until an election is concluded to start trading on it; indeed, since the moment of Boris Johnson’s resignation (and likely before), traders have been anticipating who the next Prime Minister will be and the policies that he or she will ultimately be able to enact.

With Liz Truss currently enjoying a healthy lead in the polls, we may see more limited market moves if she ultimately prevails as traders are already “pricing in” that scenario; by contrast, a surprise victory by Rishi Sunak would catch more traders offside and may lead to more volatile price adjustments.

Truss or Sunak: Who is better for the FTSE?

When it comes to their economic policies, the clearest difference between the two UK PM candidates revolves around the level of government spending. As we outlined in our initial article, Truss is in favor of immediate tax cuts and more aggressive increases in defense spending, whereas Sunak has expressed a desire to get inflation under control first, then consider increasing the government deficit.

The other major policy difference of note for equity traders is around the climate and green energy. Both candidates support the UK’s transition to net zero by 2050, though Sunak’s environmental bona fides appear more serious. Whereas Truss has indicated she would review the ban on fracking and cut subsidies for solar farms when she was the environment secretary, Sunak has come out in support of new windfarms and proposed a legal target to make the UK energy self sufficient by 2045.

If enacted, these policies could have big implications for individual industries like the defense and energy sectors, but their impacts on an index level are more difficult to parse. On balance, Truss’s apparent support for more aggressive fiscal stimulus could provide a short-term boost for the FTSE 100, though any pressure she is able to put on the BOE to raise interest rates more aggressively may offset that tailwind over the coming quarters. In contrast, a surprise victory by Sunak could see stocks fall initially as hopes of an immediate dose of fiscal stimulus fade.

FTSE index technical analysis

As the chart below shows, the FTSE has had a choppy year so far in 2022. After falling nearly 1,000 points in a Q1 swoon, UK stocks have recovered off their lows to carve out a range between support around 7,000 and resistance up at 7,700. Over the past couple of weeks, the index has shown relative strength against its US and European rivals, suggesting that traders aren’t spooked yet by the prospect of double-digit inflation and a potentially long recession in the UK.

With a few weeks still to go before the election, this range is likely to contain prices for at least a bit longer, but when the index finally picks a direction and breaks out, trend-following traders could look to play a continuation in the same direction heading into 2023.

Source: StoneX, TradingView

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.