(MENAFN - Khaleej Times) The resignations of David Davis and Boris Johnson from the UK cabinet are a seismic political event in British politics and the worst setback to Theresa May since she squandered the Tory parliamentary majority in the last election. While political instability on this scale in Downing Street is sterling negative (and sterling fell as news of the foreign secretary's resignation made global headlines), the fact remains that both Davis and Johnson were apostles of the 'hard Brexit' faction in the Conservative party. The Tories are in regicide mode, as in November 1989.
Leadership challenges are nothing new in the Conservative Party. In my own lifetime, Mrs Thatcher ousted Edward Heath, Michael Heseltine challenged Mrs Thatcher, John Redwood challenged Sir John Major, William Hague, Iain Duncan Smith and Michael Edward were all ousted as Tory leaders and now Mrs May could well be challenged by Boris and Davis.
Sterling's modest moves on the news from Westminster means the financial markets believe that the odds of a 'soft Brexit' have risen and that Mrs May will not be ousted by her hard Brexit critics. The foreign exchange market has underpriced the odds of a fragmentation in the Conservative Party, the failure to reach a deal with the EU and protracted political chaos in the sceptered isle. What if investors begin to price in the Armageddon, non-consensus scenario? If that happens, expect sterling to free fall back to 1.20 on cable. Several friends in London tell me they are house hunting in Paris or Frankfurt because their banks have activated contingency plans to move to the Continent. Office rents in the City of London, Canary Wharf and Mayfair have begun to sag.
The smart money in banking, finance and corporate Britannia is voting with its feet (literally!) to relocate to Europe as a hedge against hard Brexit. So why are investors in the currency market lulled in the complacency of a soft Brexit consensus? Lenin said the Tsar's armies voted with their feet away from the Kaiser's armies and toward the Winter Palace. So what is to prevent traders voting against a soft Brexit consensus with the mother of all sterling panics, especially when the US policy mix of tight money, fiscal stimulus and trade protectionism boosts King Dollar?
During a recent visit to the West Country (Thomas Hardy's far from the madding crowd, Bristol and Cardiff), I was amazed to see intelligent, young Brits talk to me about their enthusiasm, even passion for Corbyn. Who could have believed that the current mayor of London would be Sadiq Khan and not Zac Goldsmith. Politics, the art of the possible, is also the chessboard of the (economic) irrational, as Brexit amply attests. Is a Labour victory in the next British general election remotely priced into sterling? Absolutely not and March 2019 is a mere nine months away.
In retrospect, Mrs May made a political mistake when she summoned the cabinet to Chequers to accept a Brexit plan Davis and Johnson simply could not accept. As in the 2017 snap election, Theresa May took a political gamble and lost. Much as I adore Boris Johnson's writings as a journalist and a Churchill biographer, I doubt if the Conservative MPs will elect him to replace the admittedly robotic, un-Churchillian Mrs May, a modest woman with much to be modes about. This would vindicate the muted reaction of British equities and sterling to the prospect of a leadership challenge led by Boris Johnson. The end of Mrs May's tenure at Downing Street will only happen if a charismatic champion of hard Brexit can muster enough Tory votes to unseat her as leader. Of course, a Tory revolt can fail and Mrs May can well present her soft Brexit plan to the EU.
I doubt if backbencher Tory MPs will force a vote against the prime minister even if they dislike her as this could just escalate into a Corbyn/Labour win. So the hard Brexit resignations of last week mean the Chequers plan must be accepted by the EU. Sterling at 1.32 is midpoint between a no deal 1.20 bottom and a jolly soft Brexit deal top near 1.44. Of course, if a successful Tory revolt leads to a general election, all bets are off for the kingdom by the silver sea - and for sterling.
The writer is a global equities strategist and fund manager. He can be contacted at .