Markets welcomed the news that Rishi Sunak has been named as the UK’s new prime minister.
Westminster has been a revolving door. Sunak, who at 42 is the youngest prime minister in two centuries, is also the third leader to occupy the role in seven weeks.
Sunak first threw his hat in the leadership contest ring in the summer when Boris Johnson was ousted by the Conservative Party.
He lost to Liz Truss who stepped down last Thursday after her mini budget wreaked havoc on markets.
On the weekend there was a brief moment when it looked like Johnson would try his luck again but he dropped out of the race on Sunday night.
Stocks and the pound started to rally earlier today on speculation that Sunak would emerge as the winner.
The announcement of his win triggered a sharp rally in gilts with short dated notes leading the way. The yield on the two-year note fell by as much as 41 basis points to 3.39%.
Meanwhile, the FTSE 100 increased 0.6% on the day, supported by consumer sectors and industrials, but the index is still underperforming the broader European markets, where the STOXX 600 is up 1.2%.
Sterling had a roller coaster ride, dropping 0.1% against the dollar to $1.1291. It bounced bounced between the day’s high of $1.1402 and the low of $1.1275 in volatile trading.
Investors are betting that Sunak, who had been Chancellor of the Exchequer under Johnson, will stick to the fiscal plans of the new chancellor Jeremy Hunt, which helped inject calm into the markets after the mini budget.
Truss was forced to make a U-Turn on her key pledge of massive unfunded tax cuts. The pound sank to a new low and yields soared to their highest in years which forced the central bank to step in to stabilise markets.
“Sunak will be determined not to see the bond market run amok again, threatening the country’s financial stability,” said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
She added, “He will be revelling in the fact that his curriculum of higher taxes and curtailed spending, which he preached on the campaign trail, is already being followed.
However, it’s likely he will take an even harder line now on government budgets, given the punishment threatened to be handed out again comes in the form of much higher government borrowing costs.
He will also want to show he is co-operating with the Bank of England by being ultra conservative fiscally in a bid to tame high inflation.”
Giles Coghlan, Chief Market Analyst, HYCM, noted “Already, the markets have stabilised on the expectation that Sunak may be able to restore the UK’s finances. Before today’s announcement, the pound rallied higher at $1.13 on Monday morning as Boris Johnson exited the leadership contest, while the FTSE 100 started the day with a 0.5% boost, bringing it above the 7,000-point mark for the first time in a week.
This renewed confidence means that investors are now pricing in a slightly less hawkish hike from the Bank of England, just under 5%, lower than the 6% expected in the aftermath of the Government’s disastrous mini-budget.
However, not all market participants were optimistic. As Nigel Green, CEO of financial advisory deVere said, Group, said Sunak may be seen as having a “safer pair of hands” than his predecessor, the current relief rally of the markets will be “over sooner rather than later” because the UK still faces a “storm of economic problems”.
There is the brewing deep and painful recession, soaring energy prices, inflation running at more than 10%, labour gaps, ongoing supply chain dramas, and the Bank of England intent on hiking interest rates.”
Schroders economist George Brown said, “Investors need to be reassured the public finances are on a sustainable path.
Markets have reacted positively to his appointment on account of his fiscally conservative reputation and prior experience as chancellor. But this credibility needs to be cemented by the fiscal statement scheduled for 31 October.
Reports suggest tens of billions of pounds will be raised by reforming capital gains taxes on top of extending the freeze on income tax thresholds and allowances into the next parliament.”
