Liz Truss’s resignation as U.K. Prime Minister after just 44 days in office received the latest in a barrage of cruel verdicts from the City of London.
The pound rallied and government bond prices jumped as investors hoped that a period of political calm and relative fiscal prudence would follow.
“Although Truss was brought into usher in an era of growth and ‘trickle-down economics’, her strong pro-growth policy was poorly timed, sending the U.K. bond markets into a sharp sell off as her policies fanned the flames of surging inflation,” said Giles Coghlan, chief market analyst at broker HYCM.
“With all that in mind, Truss’s departure is likely to be mildly GBP positive, depending on her successor for the premiership. Already, the U.K. gilt market was supported as rumours of the prime minister’s resignation came to light this morning, which is a good sign for the pound’s stability,” Coghlan added.
Bookmakers Betfair made former Chancellor of Exchequer Rishi Sunak as clear favorite to become the next Conservative Party leader, and thus the new inhabitant at Number 10 Downing Street.
And it is expected that new finance minister Jeremy Hunt will stay in place. His appointment and subsequent ditching of tax cut proposals that had sparked financial market turmoil has been welcomed by the market.
Neil Wilson at Markets.com said a Sunak/Hunt combination would be viewed positively by investors, potentially helping the government see out its term and delivering what he termed “fiscal restraint” in the meantime.
U.K. assets were upbeat following Truss’s departure. Sterling
immediately gained 0.7% to $1.1308, and benchmark 10-year gilt yields
fell 12 basis points to 3.75%. At the height of the market turmoil following the ill-fated mini-Budget, the pound fell to $1.04 and yields spiked above 4.5%.
However, both the pound and gilts pared their gains as investors noted that greater fiscal prudence could damage economic growth prospects while also allowing the Bank of England to tighten monetary policy further as it seeks to damp inflation currently running at a 40-year high of 10.1%.
The more cautious reaction showed that “it will take considerable time before the risk premium attached to UK assets fades away, following the financial nervous breakdown which followed the mini-budget,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
“With the third Prime Minister in just a year expected to be announced by the end of the month, the U.K. will still be viewed in financial markets as politically unstable. What investors crave is more steadiness and reliability but until they know who will take charge and lead an economic recovery, that stability still remains highly elusive which means that neither sterling nor stocks are likely to make any big strides of progress,” Streeter added.
The FTSE 100 equity index
was little changed at 6920.