The pound’s rebound on Mahmood as Chancellor rumours is a warning to Burnham, not a green light, affirms the CEO of one of the world’s largest independent financial advisory organisations.
Nigel Green of deVere Group’s comments come as the Bloomberg British Pound Index jumped as much as 1% on Wednesday to its highest level in a year, after reports that incoming Prime Minister Andy Burnham will hand the Treasury to Home Secretary Shabana Mahmood rather than his early frontrunner, Ed Miliband.
Sterling climbed 1.1% against the dollar to $1.353 and touched a one-year high against the euro, while the 10-year gilt yield eased to 4.93%, even as no appointment has yet been formally confirmed.
Burnham is expected to unveil his full Cabinet only on Monday, when he takes office as prime minister.
deVere Group’s CEO says: “What we’re looking at is relief dressed up as confidence, and those are two very different things for a currency to be trading on.
“Investors have spent weeks pricing in the risk of a Miliband Treasury, and the moment that risk looked like it was lifting, the pound rallied hard.
“A natural reaction to bad news not materialising is not the same as investors deciding Britain’s fiscal outlook has genuinely improved.”
“A 1% move in a major currency index on a single unconfirmed report is a large swing by any standard,” Nigel Green continues.
“Moves that size, built on sourcing rather than substance, tend to be the most fragile kind. Nothing has actually changed about the UK’s fiscal position in the past 24 hours.
“What changed is expectations about who will manage it, and expectations can shift again just as quickly if the reporting turns out to be wrong or if Mahmood’s actual policy agenda disappoints once she is in the job.
“Burnham himself gave investors reason for caution on the very day this rally happened,” he adds.
“He described the coming fiscal decisions as difficult and declined to rule out new wealth taxes.
“This is the language of a government that knows painful choices are coming, not one settling into safe, predictable territory, and markets have a habit of underpricing exactly that kind of warning in the excitement of a Cabinet reshuffle.”
Nigel Green points to Mahmood’s limited economic track record as a further reason for caution.
“She has never held an economic brief. Her reputation for discipline comes from immigration policy, not fiscal policy, and investors are essentially extending credit to her on reputation rather than record.
“Bets built on reputation rather than record can work out well, but they remain bets, and bets like this have a habit of unwinding the moment reality intrudes on the narrative.
“If Burnham confirms Mahmood and she holds firmly to the existing fiscal rules through the autumn Budget, this rally has a real chance of holding and even extending,” the deVere CEO explains.
“But if he wavers under pressure from the left of his own party, or if wealth taxes and borrowing plans turn out to be more aggressive than markets currently expect, sterling can give back these gains faster than it made them.
“Currency markets don’t reward promises, rather delivery, and delivery is still months away.”
He concludes. “Treat this rally as a reprieve, not a resolution. Watch what happens on Monday when the Cabinet is confirmed, and watch the autumn Budget even more closely, because that is where Burnham’s government will show its true colours on tax and spending.
“Until then, sterling’s strength is built on hope rather than proof, and hope is a poor foundation for anyone holding UK assets to get comfortable on.”