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Wall Street and FTSE 100 in the green as Johnson’s premiership hangs by a thread

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·Finance Reporter, Yahoo Finance UK
·5-min read
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FTSE 100 British Prime Minister Boris Johnson addresses his cabinet ahead of the weekly cabinet meeting in Downing Street in London, Britain July 5, 2022. Justin Tallis/Pool via REUTERS
FTSE 100: Boris Johnson is fighting for his political survival. Photo: Justin Tallis/Pool via Reuters

The FTSE 100 and European stock markets climbed this Wednesday after their worst single-day performance in three weeks yesterday amid recession fears, as investors brace for months of political uncertainty.

On Wall Street, stocks inched higher as investors awaited minutes from the Federal Reserve's meeting last month for clues on the health of the economy and the pace of interest rate hikes to combat high inflation.

The S&P 500 (^GSPC) was up 0.4% and the Dow Jones Industrial Average (^DJI) gained 0.2%. The Nasdaq (^IXIC) advanced 0.3% as trading closed in Europe.

The FTSE 100 (^FTSE) in London closed in the green with a 1.2% gain, following yesterday’s near-3% slump. Germany’s Dax (^GDAXI) was up 1.6% while France’s CAC (^FCHI) advanced 1.9%.

Sentiment has been helped by a revival on Wall Street after global markets had a major case of the recession blues earlier.

Naeem Aslam, chief market analyst at Avatrade, said: "The mood among investors and traders remains pessimistic as the threat of an economic downturn lingers. Yesterday, we saw an interesting price action for the US stock markets as the stock indices plunged at the beginning of the session but then towards the market close, we saw an enormous recovery.

Read more: Bank of England issues dire forecast for UK: expect more pain and misery

"Today’s price action is going to focus on two things: firstly, the political crisis in the UK, which began yesterday with the resignation of [some] of Johnson’s top team members.

"Secondly, traders will be looking at the [Federal Reserve] minutes, which will be released later today. The expectations are that the Fed will confirm their hawkish stance, and this means more interest rate hikes and the attitude of whatever it takes to bring inflation lower as Jerome Powell said previously that the biggest risk for the US is failing to restore price stability."

Investors are keeping a close eye on the latest developments at Number 10 as Boris Johnson's premiership is hanging on by a thread after both Rishi Sunak and Sajid Javid resigned last night.

Johnson has made it clear he does not intend to leave Number 10, and has appointed Nadhim Zahawi as his new chancellor and Steve Barclay as health secretary.

The new UK chancellor seems to have been talking up the prospects of tax cuts, according to the Times political editor.

JPMorgan economist Allan Monks says events could move quickly. "Both chancellor Sunak and health secretary Javid have stepped down, placing significant additional pressure on the Prime Minister whose position was already weakened after only narrowly winning a confidence vote last month.

Read more: Brexit: MPs warn UK government against overselling benefits of trade deals

"Current party rules stipulate that Johnson cannot face another no-confidence vote until next summer. But the main risk now is either that those rules will be changed to force another vote, or Johnson is pressured to voluntarily step down. Events could move very quickly, with a Conservative leadership contest potentially putting in place a new prime minister in the next couple of months or so – ahead of the party’s annual conference in early October."

Meanwhile, oil prices dropped under the $100 mark in weeks, with Brent crude (BZ=F) losing 3.5% to almost $99 a barrel.

Market volatility reflects growing worries among investors that economies are slowing under the weight of surging inflation and sharply higher interest rates, pressures that could tip them into recession.

“Although China has had another wave of COVID, nothing new or market-related seemed to justify the severity of the move,” said Stephen Innes, managing partner at SPI Asset Management about the oil prices.

Asian markets closed in the red as the surge in COVID infections in China reignited worries about potential lockdowns. The Shanghai Composite (000001.SS) retreated 1.4% while the Hang Seng (^HSI) in Hong Kong lost 2.1%. Tokyo’s Nikkei 225 (^N225) fell 1.2%.

Read more: UK firms planning further price hikes as inflation bites

““In the US, equity markets opened much lower, but US bond yields outdid them, slumping on recession nerves overnight and sending the US 10-year down to 2.805%, leaving the 2-year 10-year yield curve teetering on inversion.

“The still-richly-valued growth stocks of the Nasdaq are the most interest-rate sensitive on US markets, and small moves in the risk-free discount rate have outsized price impacts in these environments,” Jeffrey Halley, senior market analyst at OANDA, said.

Watch: What is a recession and how do we spot one?

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