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Sterling whipsawed Tuesday as Boris Johnson emerged as the winner of the Conservative Party leadership contest, and will become British Prime Minister as of Wednesday.

The currency initially fell for a third day running during morning trade, plunging a further 0.4% against the dollar to reach a 27-month low. Investor jitters center around concern that Johnson could pull the U.K. out of the European Union without a formal deal in place.

But immediately after Johnson was announced as the country’s next leader, the pound pared its losses to trade around the flatline at $1.2474. Johnson’s rise to power had largely been priced in by the markets and the announcement meant one rung of uncertainty had been removed.

Johnson will deliver his maiden speech as prime minister outside 10 Downing Street on Wednesday. On Tuesday, Johnson struck a compromising tone, promising to “unite the country,” but reiterated calls for optimism on the prospect of the U.K. leaving the bloc.

Michael Brown, a senior analyst at Caxton FX, said his focus would quickly switch to the next steps: “Namely, Cabinet appointments and the Brexit plan. The latter will be of more importance for markets, with sterling set to remain under pressure should Boris continue his ‘do or die’ Halloween Brexit stance.”

Britain’s National Institute of Social and Economic Research (NIESR) published a report on Monday which suggested that there is now a 40% chance of a “no-deal” Brexit on October 31, an event anticipated by many to be profoundly damaging for the British economy.

Johnson has vowed repeatedly to take the U.K. out of the EU with or without a deal in place, while also rejecting the existing Withdrawal Agreement negotiated by his predecessor Theresa May, and pledging to return to Brussels to seek new terms.

In the past week, as 160,000 Conservative Party members cast their ballots to elect the country’s next leader, both Johnson and rival Jeremy Hunt hardened their stance on the Irish backstop clause insisted upon by Brussels, therefore increasing the likelihood of a no-deal departure.

In a recent note, Berenberg senior economist Kallum Pickering raised the risk of a hard Brexit — in which the U.K. exits both the EU’s customs union and its single market to trade on World Trade Organization terms — to 40%, making it Berenberg’s base case.

However, as Pickering pointed out, Johnson has a reputation for adapting his rhetoric to changing tides of political sentiment. A Conservative member of the House of Lords, Michael Heseltine, once described Johnson as “a man who waits to see the way the crowd is running and then dashes in front and says ‘follow me’.”

Speaking to CNBC Monday, Pickering said an unresolved Brexit was like a “kidney stone lodged in the abdomen of the British economy,” and projected greater sterling weakness until a resolution is found.

In a further note Tuesday, Pickering suggested that Johnson’s promise to scrap the Irish backstop from the Withdrawal Agreement may just be a high-risk negotiating strategy, with a low chance of success, to push for compromise from Irish Prime Minister Leo Varadkar to accept a half-way deal. If the EU refuses Johnson’s demand, Pickering predicted, moderate British lawmakers could move to thwart a no-deal exit, setting the stage for a “major showdown in Parliament” in the fall. This could lead to a further Brexit extension, a snap election or a second referendum.

“While Johnson may be forced to take a more pragmatic line eventually, we do not expect him to use soft words on Brexit in his first speech,” Pickering wrote on Tuesday.

“In the not-unlikely event that he doubles-down and appears to harden his Brexit stance further, U.K.-oriented equities and sterling would likely react negatively.”

Boxed into a hard Brexit

Two further developments suggest that the hard Brexit risk has increased. Ahead of his anticipated coronation, Johnson has been surrounding himself with hardliners likely to box him into pursuing the exit door on Halloween come what may. As he begins to name his Cabinet this week, the extent of the euroskeptic makeup of his ministers could further impact the currency.

Meanwhile, the main opposition Labour party is sliding in the polls, rendering it a lesser threat in the event of a snap general election and potentially leading moderate Conservative members of parliament (MPs) to back no deal, in order to protect their seats from the surging Brexit Party.

The odds of an election in the fall are rising sharply. Stephen Gallo, European head of FX strategy at BMO Capital Markets, said in a note Monday that Johnson will have an “incredibly narrow window of opportunity” to exploit Labour’s vulnerability, cut a deal with the Brexit Party to preserve Conservative seats, and lay out a post-EU and domestic policy agenda.

“That window starts to close rapidly by the end of the year, and there is no telling what 2020 will bring without a new parliamentary arithmetic for the Tory (Conservative) leadership to work with,” Gallo said.

“We still believe there is more GBPUSD weakness to come.”

Kamal Sharma, director of G-10 FX strategy at Bank of America Merrill Lynch, said the combination of Brexit factors weighing on the U.K. economy meant a potential “flash crash” for sterling could not be ruled out.

“The current account deficit has been the Achilles heel for the U.K. for a number of years now. Historically, the U.K. has been a very big recipient of FDI (foreign direct investment),” he told CNBC’s “Squawk Box Europe” on Monday.

“It’s now becoming more of a net debt story, so if investors start to suddenly give up on the U.K., for example, given the liquidity situation of sterling already, that really opens us up to a potential flash crash.”

Things can only get better

However, not all analysts were quite so pessimistic. Giles Keating, senior advisor at Torchwood Capital, told CNBC Tuesday that most of the bad news is already priced into sterling and investors could “start to look forward.”

“What do you look forward to? Fiscal expansion — can the Bank of England react to a big fiscal expansion by cutting interest rates? It doesn’t seem to me to make sense. That debate could end up being to hold rates here at a time when others were cutting them,” he told CNBC’s “Squawk Box Europe.”

“The Bank of England is looking at an economy where wages are accelerating. The latest wage rises are really moving up sharply, we had the National Institute warning yesterday of 4% inflation as a risk — the Bank, in my mind, can’t cut against that background.”

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Hong Kong police and protesters clash, ending violence lull

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An anti-extradition bill protester throws Molotov cocktails during clashes at a march to demand democracy and political reforms, at Kowloon Bay, in Hong Kong, China August 24, 2019.

Tyrone Siu | Reuters

Hong Kong protesters threw bricks and gasoline bombs at police, who responded with tear gas, as chaotic scenes returned to the summer-long anti-government protests on Saturday for the first time in nearly two weeks.

Hundreds of black-clad protesters armed with bamboo poles and baseball bats fought with police officers wielding batons on a main road following a march against “smart lampposts” that was sparked by surveillance fears.

The chaotic scenes unfolded outside a police station and a nearby shopping mall as officers in riot gear faced off with protesters who set up makeshift street barricades.

The violence interrupted nearly two weeks of calm in Hong Kong, which has been gripped by a turbulent pro-democracy movement since June.

Police fired tear gas to disperse the crowd after repeated warnings “went futile,” the government said in a statement. By early evening, most of the protesters had dispersed, though clashes flared up in other neighborhoods.

Earlier in the day, some protesters used an electric saw to slice through the bottom of a smart lamppost, while others pulled ropes tied around it to send it toppling and cheered as it crashed to the ground.

The protest march started peacefully as supporters took to the streets to demand the removal of the lampposts over worries that they could contain high-tech cameras and facial recognition software used for surveillance by Chinese authorities.

The government in Hong Kong said smart lampposts only collect data on traffic, weather and air quality.

The protesters chanted slogans calling for the government to answer the movement’s demands. The protests began in June with calls to drop a now-suspended extradition bill that would have allowed Hong Kong residents to be sent to China to stand trial, then widened to include free elections for the city’s top leader and an independent inquiry into alleged police brutality.

“Hong Kong people’s private information is already being extradited to China. We have to be very concerned,” organizer Ventus Lau said ahead of the procession.

The semiautonomous Chinese territory has said it plans to install about 400 of the smart lampposts in four urban districts, starting with 50 this summer in the Kwun Tong and Kowloon Bay districts that were the scene of Saturday’s protest march.

Hong Kong’s government-owned subway system operator, MTR Corp., shut down stations and suspended train service near the protest route, after attacks by Chinese state media accusing it of helping protesters flee in previous protests.

MTR said Friday that it may close stations near protests under high risk or emergency situations. The company has until now kept stations open and trains running even when there have been chaotic skirmishes between protesters and police.

Lau said MTR was working with the government to “suppress freedom of expression.”

Also Saturday, Chinese police said they released an employee at the British Consulate in Hong Kong as scheduled after 15 days of administrative detention.

Simon Cheng Man-kit was detained for violating mainland Chinese law and “confessed to his illegal acts,” the public security bureau in Luohu, Shenzhen, said on its Weibo microblog account, without providing further details.

The Chinese government has said that Cheng, who went missing after traveling by train to mainland China for a business trip, was held for violating public order regulations in Shenzhen, in a case that further stoked tensions in Hong Kong, a former British colony.

The British government confirmed his release.

“We welcome the release of Simon Cheng and are delighted that he can be reunited with his family,” the Foreign and Commonwealth Office said in a statement, adding that Cheng and his family had requested privacy.

Cheng, a Scottish government trade and investment officer, was a local employee without a diplomatic passport.

The Global Times, a Communist Party-owned nationalistic tabloid, said Thursday that he was detained for “soliciting prostitutes.” China often uses public order charges against political targets and has sometimes used the accusation of soliciting prostitution.

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As EU threatens trade retaliation, Brazil fights Amazon fires

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A charred trunk is seen on a tract of Amazon jungle that was recently burned by loggers and farmers in Iranduba, Amazonas state, Brazil, August 20, 2019.

Bruno Kelly | Reuters

European leaders on Friday threatened to tear up a trade deal with South America, reflecting growing international anger at Brazil as a record number of fires in the Amazon rainforest intensified an unfolding environmental crisis.

Amid a global chorus of concern and condemnation, Brazil’s right-wing President Jair Bolsonaro pledged in an address to the nation to mobilize the army to help combat the blazes, while his administration launched a diplomatic charm offensive to try to mend bridges overseas.

Forest fires in the Brazilian Amazon, which accounts for more than half of the world’s largest rainforest, have surged in number by 83% this year, according to government data, destroying vast swathes of a vital bulwark against global climate change.

French President Emmanuel Macron called for G7 leaders to discuss the environmental crisis in Brazil at a summit this weekend in the French coastal resort of Biarritz. Both France and Ireland threatened to oppose an EU trade deal struck in June with a regional South American bloc following Brazil’s response.

Images of fires raging in the Amazon broadcast around the globe sparked protests outside Brazilian embassies from Mexico City and Lima to London and Paris.

In the Cypriot capital Nicosia, a sign tied to the railings of Brazil’s diplomatic mission read: “The Amazon belongs to Earth not to the Brazilian president.”

Bolsonaro, who initially accused non-governmental organizations of setting the forest on fire without providing any evidence, said in a televised address he had authorized the use of troops to fight the fires and stop illegal deforestation in the Amazon.

But the former military officer attributed the scale of the fires to dryer-than-average weather and insisted on the need for economic development of the Amazon to improve the lives of its 20 million inhabitants.

Environmentalists have warned that his controversial plans for more agriculture and mining in the region will speed up deforestation.

“We have to give the population the opportunity to develop and my government is working for that, with zero tolerance for crime – and that is no different for the environment,” Bolsonaro said in his televised speech.

Polls show Brazilians overwhelmingly oppose his policy on the environment and as he spoke to the nation, residents in large cities across Brazil banged on pots and pans in a traditional Latin American form of protest.

President Donald Trump – whose skeptical views on climate change Bolsonaro shares – called the Brazilian president to offer help, if needed, in dealing with the wildfires.

“I told him if the United States can help with the Amazon rainforest fires, we stand ready to assist!” Trump said in a post on Twitter.

G7 set to discuss fires

The wildfires now look set to be discussed at the summit of G7 leaders in France this weekend, where Macron has called for leaders to sign a charter to protect biodiversity. The French leader said an “ecocide” was taking place in the Amazon that required an international response.

British Prime Minister Boris Johnson tweeted that the fires were “not only heartbreaking, they are an international crisis,” while a spokeswoman said Johnson would use the summit to call for a renewed focus on protecting nature.

France and Ireland said on Friday they would now oppose the E.U.-Mercosur farming deal struck in June between the European Union and the Mercosur countries of Brazil, Argentina, Uruguay and Paraguay.

The French president’s office accused Bolsonaro of lying when he downplayed concerns over climate change at the G20 summit in June.

“There is no way that Ireland will vote for the EU-Mercosur Free Trade Agreement if Brazil does not honor its environmental commitments,” Ireland’s Prime Minister Leo Varadkar said in a statement.

The EU-Mercosur deal took 20 years to negotiate, but will not be officially ratified for at least another two years.

Brazilian business leaders also warned the backlash over Brazil’s environmental record could sink its efforts to join the Organization for Economic Co-operation and Development (OECD), a Paris-based club of 37 developed nations whose imprimatur is required by many institutional investors.

Stung by the international outcry, Brazil distributed a 12-page circular, exclusively seen by Reuters, to foreign embassies, outlining data and statistics defending the government’s reputation on the environment.

Having first dismissed the fires as natural, then blaming non-governmental organizations without evidence for lighting them, Bolsonaro appeared to adopt a more serious approach on Friday following the international outcry, summoning top cabinet members for an afternoon meeting to tailor a response.

Agriculture Minister Tereza Cristina Dias insisted that Brazil was “taking care” of the Amazon, and that international concerns over the fires needed to cool down.

“The news is worrying, but I think we have to lower the temperature. The Amazon is important, Brazil knows that, and Brazil is taking care of the Amazon,” she told reporters.

‘Interfering with our sovereignty’

The Brazilian space agency INPE has registered 72,843 fires this year, the highest number since records began in 2013. More than 9,500 have been spotted by satellites over the past week.

Although fires are a regular and natural occurrence during the dry season at this time of year, environmentalists blamed the jump on farmers clearing land for pasture.

Farmers may have had at least tacit encouragement from the firebrand right-wing president, who took power in January.

Bolsonaro has repeatedly said he believes Brazil should open up the Amazon to business interests, allowing mining, agricultural and logging companies to exploit its natural resources.

On Thursday, Bolsonaro admitted for the first time that farmers may be behind some of the fires but he responded angrily to what he saw as foreign interference.

Some foreign donors – including the biggest, Norway – have slashed their funding to an Amazon Fund designed to curb deforestation in the region in protest at changes introduced by Brazil that blocked its operations.

“These countries that send money here, they don’t send it out of charity … They send it with the aim of interfering with our sovereignty,” Bolsonaro said.

Alexandre Antonelli, director of science at Britain’s Kew Royal Botanic Gardens, urged that import sanctions be imposed on Brazil because of the fires.

“Immediate action is necessary to extinguish the current fires and prevent future ones,” the Brazilian scientist said.

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Trump is meeting with world leaders at G7 as he escalates US-China trade war

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U.S. President Donald Trump and First Lady Melania arrive in Biarritz for the G7 summit, France August 24, 2019. REUTERS/Regis Duvignau

Regis Duvignau | Reuters

President Donald Trump arrived in France on Saturday for the annual meeting of the Group of 7 powers, one day after he called his Federal Reserve chief an enemy of the United States and urged American companies to end business with China in the midst of an escalating trade war.

The summit comes amid fears over a global economic slowdown, and U.S. tensions with allies over trade, Iran and Russia.

Trump said Friday he will raise existing duties on $250 billion in Chinese products to 30% from 25% on Oct. 1. Additionally, tariffs on another $300 billion in Chinese goods, which start to take effect on Sept. 1, will now be 15% instead of 10%.

In addition to the China trade war tensions, the president has maintained tough rhetoric against the European Union. The White House is set to decide in November whether they will impose duties on the autos industry in Europe.

Earlier this year, Trump vowed to set tariffs on imported vehicles and parts from the EU and Japan, but delayed that duty for 180 days in May. The president signed a deal with the EU earlier this month to boost U.S. beef exports.

Trump again threatened to tax European cars Tuesday.

“Dealing with the European Union is very difficult; they drive a high bargain,” Trump said. “We have all the cards in this country because all we have to do is tax their cars and they’d give us anything we wanted because they send millions of Mercedes over. They send millions of BMWs over.”

Experts say that trade conflict with Europe could be much more damaging than the current tit-for-tat conflict with China.

British Prime Minister Boris Johnson told reporters upon his arrival in France that he plans to tell Trump at the summit to pull back from the trade war with China. Johnson said his priorities for the summit “are clearly the state of global trade.”

“I am very worried about the way it’s going, the growth of protectionism, of tariffs that we’re seeing,” Johnson told reporters on the tarmac.

Trump’s first meeting on Saturday was a private lunch with French President Emmanuel Macron.

Macron, who will host the summit, said they were discussing world crises, including Libya, Iran and Russia, as well as trade policy and climate change.

Trump said he anticipated the lunch with Macron would go well. 

“We actually have a lot in common, Emmanuel and I. We’ve been friends for a long time. And every once in a while, we go at it just a little bit — not very much. But we get along very well,” he said. 

When asked if he would place tariffs on French wines in retaliation for France’s digital services tax, which he previously threatened to do, Trump was noncommittal, but responded that he loves French wine.

Donald Tusk, president of the European Council, said on Saturday that the EU would “respond in kind” if the U.S. imposes tariffs on France over the digital tax plan.

The G-7, which represents the world’s major industrial economies, includes the U.S., Germany, France, Japan, Canada, Italy, and the U.K.

At the summit, world leaders are expected to discuss several foreign policy matters, including Iran and tensions between India and Pakistan, as well as record wildfires in the Amazon rainforest that have spurred global outrage.

Formal talks begin Sunday morning. Many experts expect the summit to end without a joint communique because of clashes on trade.

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