SINGAPORE/LONDON - British markets were bracing for more political uncertainty on Wednesday, with investors keen to see if the new finance minister loosens the purse strings and wondering whether Prime Minister Boris Johnson will survive an exodus of support.

The pound was stuck near two-years lows against the dollar and British stocks bounced.

Some analysts attributed the gains to hopes for more public spending, but the rise in prices was in line with gains across broader markets and followed big falls on Tuesday, when Johnson's grip on power was rocked by Rishi Sunak quitting as finance minister and Sajid Javid resigning as health secretary.

Several others left their junior ministerial or envoy roles.

Analysts said markets were struggling to decide what this week's events meant until they had a better understanding of the priorities of Nadhim Zahawi, the new finance minister, and whether Johnson could weather the storm.

UK stocks, which fell heavily on Tuesday along with a wider market selloff, rose on Wednesday. Britain's FTSE 100 was up 1.44% while the more domestically focused FTSE 250 rose 1.21%, in line with euro zone shares.

The pound was unchanged at $1.1961, unchanged on the day but slightly above the $1.1899 hit on Tuesday.

"Financial markets will evaluate developments here in terms of their impact on economic policy. Expectations are that the new chancellor will lean towards more fiscal generosity than his predecessor has been recently," said Paul O’Connor, head of UK-based Multi Asset Team at Janus Henderson.

But O'Connor said the new finance minister faced huge challenges, including collapsing consumer confidence, decades-high inflation and a slowing economy.

"The new chancellor is not going to be in a position to substantially alter the course of the UK economy," he added.

Broader macroeconomic developments, including concerns about the fallout from a new surge in natural gas prices, had hit UK stocks and sterling hard on Tuesday and continued to overshadow the political drama unfolding in Westminster.


While Johnson's new team could unveil populist spending measures in the short term to shore up his support, his premiership remains in doubt after the slew of resignations from ministers saying he was not fit to govern. He faces questions in parliament on Wednesday, followed by a grilling by senior lawmakers.

Investors expect little respite in the near term for sterling. Implied volatility on the British pound hit a two-week high as traders expect a rocky road for the currency.

The BoE's trade-weighted sterling index, which measures the pound against a basket of currencies, fell on Monday to its lowest since January last year.

Bookmakers have ramped up bets of Johnson's departure before the end of the year to as much as 85% on Wednesday from 50% on Tuesday, according to RBC Capital Markets.

"We see two key factors driving the markets’ indifference to political risk in the UK. Firstly, markets have now all but written off Johnson as PM going forward," said Stuart Cole at RBC, citing the bookmakers' data.

"Secondly, there is no clear frontrunner to replace Johnson, so it is hard to take a view on what his departure would mean for policy."

(Reporting by Tom Westbrook and Vidya Ranganathan in Singapore Additional reporting by Herbert Lash in New York; Writing by Tommy Reggiori Wilkes; Editing by Sam Holmes and Alison Williams)