Moody’s and Goldman Sachs have both warned that Boris Johnson’s victory in the race to become the UK’s next prime minister has increased the likelihood of an economically damaging no-deal Brexit.
The rating agency, which earlier this month warned no-deal would likely lead to a recession, said the risk of a credit-negative crash out of the EU has risen.
“Any Brexit compromise now seems less likely,” Moody’s said in a report released soon after Mr Johnson was named as the UK’s next prime minister at an event in central London, securing nearly two-thirds of votes from Conservative party members.
“Our view remains that a no-deal Brexit would have significant negative credit effects for the UK sovereign and related issuers,” the ratings group said.
US bank Goldman Sachs raised its forecasts of a no-deal Brexit from 15 per cent to 20 per cent following Mr Johnson’s election. “With Boris Johnson at the helm, the tail risks are likely to intensify ─ well into October,” said the bank’s economists.
Goldman sees the odds of a negotiatied Brexit deal at 45 per cent and no Brexit at all at 35 per cent.
The pound traded lower after Mr Johnson was named as the next Conservative leader, with many investors expecting his leadership to usher in a new period of Brexit uncertainty.
The pound was recently down 0.3 per cent at $1.2440, around one cent above the 17-month lows it plumbed last week when Mr Johnson and his rival for the leadership Jeremy Hunt both hardened their stance on renegotiating outgoing prime minister Theresa May’s exit deal with the EU.
Mr Johnson said he hopes to deliver Brexit, unite the country and defeat the opposition Labour party, although his speech did not offer any fresh insight into his plan for leaving the EU.
The pound has fallen more than 2 per cent this month as investors have repriced the chances of a no-deal Brexit under Mr Johnson, and is down 2.6 per cent for the year to date.
“Seeking a meaningful change to the agreement from the EU – and then getting enough MPs to support it – will be seriously challenging,” said James Smith, developed markets economist at ING.
Mr Johnson is expected to set out his vision for the country on Friday, and to tour European capitals to discuss his hopes for a new Brexit deal soon after. He took a particularly hard stance on Brexit in the leadership campaign, and has promised to leave the EU at the end-of-October deadline “come what may”.
Currency traders are bracing for swings, and have piled into contracts which pay out if the currency fluctuates in the run-up to the October 31 Brexit deadline. “Sterling volatility spiked significantly last week amid renewed political chaos in the UK and the resulting concerns around a hard Brexit,” analysts at Bank of America said.
Investors’ expectations for swings over the next three months have risen further this week, although they remain below the levels seen during Mrs May’s failures to force her Brexit deal through parliament.
Analysts and investors will be watching closely to see if Mr Johnson’s rhetoric moderates once in Downing Street.
“Mr. Johnson may take a more conciliatory approach in office,” said Mark Haefele, chief investment officer at UBS Wealth Management.
UBS said it estimates the market is now pricing in a 50 per cent chance of a no-deal Brexit, which faces several barriers including parliamentary opposition. “The market may now be overstating the short-term risks of a no-deal departure,” Mr Haefele said.