How Queen Elizabeth II’s death will impact world markets

The Queen’s passing is set to see a mixed reaction on the world’s financial markets, with the British pound and shares most affected.

Financial markets are set to largely look through the death of the Queen, although the British pound and shares in London may weaken slightly given investor uncertainty over the smooth transition of power in the Royal Family.

The ASX will observe a minute’s silence at 11am AEST but remain open Friday.

The British economy, already facing a slowdown with interest rates on the rise to tame a breakout of inflation, could also experience short term impact from the Queen’s passing. Here consumer spending and business activity is expected to remain subdued during a period of official mourning and her funeral.

However, similar to the experience following Covid-19 lockdowns, consumer spending and confidence is likely to quickly return to more normal levels in the days following her passing.

Shares in London may weaken slightly. Picture: Chris Ratcliffe/Bloomberg

Political stability and confidence remains key to the smooth running of financial markets. A clear path for the transition of power through the Royal Family to the Queen’s successor would send a strong signal to investors on this front. Risks would be further minimised with bipartisan support toward the new head of state from Boris Johnston’s Conservatives and the Labour opposition.

Investors will still be watching closely for any signs of possible power vacuum inside the Royal Family that could draw out political tensions inside the UK government. However given extensive planning around the Queen’s passing this is seen as unlikely.

“On balance I would see it as a very slight, almost knee-jerk negative, for investor confidence on the grounds that it may lead to some worry about the stability of the monarchy,” said AMP Capital’s chief economist Shane Oliver.

A sell-off in the pound could weigh on the London Stock Exchange, with the benchmark indicator the FTSE 100 index to fall slightly. UK bonds – known as gilts – could also see some selling pressure as debt investors trim their exposure.

Any impact would be “marginal and short lived”, Dr Oliver said, with no reason to expect the Queen’s successor to lead to increased instability.

Queen Elizabeth II in Edinburgh on June 27. Picture: AFP

A more uncertain scenario to put stronger pressure on the British pound is if the death of Queen Elizabeth sets a process in chain for the break-up of the United Kingdom.

Scotland, which narrowly voted to remain in the United Kingdom in 2014, would be the most likely to push for an independence referendum. Scotland remains a major source of energy and revenue from its North Sea oil and gas reserves, although its offshore fields are starting to mature.

During the Brexit vote of 2016 Scotland had backed remaining with the European Union and the decision by the UK to leave the massive European market remains a source of ongoing tension today.

Elsewhere, risks could emerge in Britain and Wales to remove the Royal Family as head of state although this is seen as less likely.

One question remains over the longer term impact on the UK’s tourism market, with the Queen and the Royal Family estimated to help generated a large slice of the GBP4.5bn in tourism turnover directly linked to heritage and culture, although the Covid-19 pandemic and ongoing fallout from Brexit on tourism means this is harder to measure.

AMP Capital’s chief economist Shane Oliver. Picture: Chris Mangan

The Queen and the Royal Family have played no role in the running of the modern British economy with responsibility for spending and policy initiatives sitting entirely with the government of the day.

While she has been briefed of decisions, there was no input from the Queen into some of the most significant economic decisions including the devaluation of the pound in 1967 and the decision by the then Labour government to seek emergency loans from the IMF in 1976.

The UK carries “AA” rating from S&P a credit agency, given the relatively high debt-to-GDP ratio of 96 per cent. Australia by comparison, carries the higher ‘AAA’ rating, notably with a lower debt-to-GDP ratio of around 43 per cent.

Meanwhile there will be little local fallout from the Queen’s passing on Australian economy, even as she has been the official head of state here for 70 years.

“It’s hard to see it having any impact on economic activity in Australia and if it does lead to a move towards Australia becoming a republic this would transpire over many years requiring discussion with the Queen’s successor, proposed options for a republic and then a successful referendum,” AMP’s Dr Oliver said.

“Any even if successful there is no reason to see it resulting in political instability in Australia,” he said.

This is likely to apply to other key members of the Commonwealth including Canada and New Zealand.