Traders say ‘markets are calling the shots' as Truss exits

The Bank of England in the City of London. Investors are hoping the next prime minister will restore calm.

This month of UK economic chaos will be a warning to any future British leaders about the risk of being reckless with the country’s finances, said UK traders after Prime Minister Liz Truss resigned.

Many investors predicted that the next prime minister will restore calm and make policy decisions that bring stability back to markets.

The pound strengthened to above $1.13, and the yield on UK 10-year gilts was near levels before the mini-budget was announced last month. The Ffse-250 index rallied as much as 1.2%.

“Markets are calling the shots right now,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “That’s the bottom line.” 

Volatile markets

Some traders said markets will be volatile until a replacement is named, and any new leader will struggle to fix the UK’s weak economy and double-digit inflation.

“As long as there is a lack of clarity on Truss’s successor, there will remain a risk premium in gilt markets, which is in our view still around 20 to 30 basis points,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital.

Ms Truss said that the UK Tory leadership vote would be completed in a week, although chancellor of the exchequer Jeremy Hunt won’t stand to be Conservative Party leader, according to a spokesman.

Candidates to replace her are likely to include former chancellor Rishi Sunak. Ex-prime minister Boris Johnson is expected to stand in the leadership contest, The Times reported, citing unidentified people. Other contenders then are also likely to be in the fray, including Penny Mordaunt, Grant Shapps and Kemi Badenoch. 

'Sense of relief'

“There is a sense of relief that it is all over for Truss. But there’s still uncertainty here. Can the Tories coalesce around a candidate or will there be further division? Will we see early elections? More questions than answers in this moment,” said Mark Dowding, chief investment officer at BlueBay Asset Management.  

Robert Alster, chief investment officer at Close Brothers Asset Management, said that markets are looking for a more balanced budget and more political stability for the UK, and sterling is rising in the hope that the new prime minister will provide both.

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence, said that "the Trussonomics premium should unwind from markets and lessons will be learned from the scene of the crash". 

"Damage limitation is now key to allow the market to have a sustained period of stability,” the strategist said. 

Rishi Mishra, an analyst at Futures First said: “It’s positive for both the pound and gilts in the long run because this episode will remind every candidate in the future to not undermine the credibility of the government by making outlandish spending plans.” 

Guillermo Hernandez Sampere, head of trading at asset manager MPPM, said that "a serious solution must be found rather quickly to calm markets as political disagreement is poison for confidence in the market.” 

Bloomberg