New UK Prime Minister Boris Johnson Faces Challenges at Home and Abroad

Boris Johnson, one of the most enthusiastic supporters of Brexit, is the United Kingdom’s new prime minister. David Zahn, Franklin Templeton’s Head of European Fixed Income, doubts Johnson will have much of a honeymoon period in the new role as he faces stiff challenges domestically and internationally, with global markets scouring his every move.

As expected, Boris Johnson won the UK Conservative Party leadership race and with it the keys to 10 Downing Street.

But as he looks to establish his administration and set out a policy agenda over the coming weeks, Johnson faces profound challenges and scrutiny both at home and abroad.

He enters Downing Street at a time of heightened international tensions between the United Kingdom and Europe over Brexit, but also in the Middle East, where the UK relationship with Iran has deteriorated dramatically in recent days. All of these considerations are likely to have significant implications for markets.

Markets Respond to Johnson’s Victory

We’ve already seen some market movement in response to news of Johnson’s leadership victory, and we expect volatility to continue for several weeks as he builds his government.

Yields on 10-year Gilts are around 70 basis points (bps), or 0.70%,1 reflecting an overall decline in yields globally but also weaker UK growth numbers.

While 0.70% 10-year Gilts may not sound attractive to investors, we’d expect to see that number go much lower in the event of a no-deal Brexit.

The pound has also come under pressure against the US dollar and euro, again reflecting concern about the possibility of a no-deal Brexit.