Markets reassured as Truss leadership ends
25 Oct, 2022

Markets reassured as Truss leadership ends

Azad Zangana, Senior European Economist and Strategist at Schroders

UK Prime Minister Liz Truss performs one final U-turn and resigns, causing the pound to rise and government borrowing costs to fall

After just 44 days in office, Liz Truss drew a close to her disastrous premiership, resigning after losing the backing of her party. She claims the unenviable title of the shortest-serving prime minister in the UK’s history.

For investors, Truss’s resignation was largely expected. Her low-tax libertarian post-Brexit vision for the economy came to a crashing halt when it was met by the forces of reality and markets. Investors were unwilling to allow her and her first chancellor, Kwasi Kwarteng, to borrow hundreds of billions of pounds at a time when interest rates were rising.

What happens now

The Conservative Party will now hold a contest, starting with members of the parliamentary party who will vote and eliminate potential candidates, until there are two remaining. The processes will be accelerated and end by the end of next week (28 October 2022). If the contest produces two clear opposing candidates, a ballot will be held amongst party members, which is likely to take another 4-5 weeks.

However, should one of the final two candidates concede, then the remaining candidate will win the contest and become the next prime minister – the fifth in six years.

Former chancellor Rishi Sunak is the betting markets’ favourite to succeed Truss (47% probability), though the previous front runner for PM Penny Mordaunt is seen as his main rival (27%). Oddly, former PM Boris Johnson is the third favourite (15% chance), though, given the way he was ousted earlier this year, he seems unlikely to win.

Supporters of the party hope for a quick change in leadership, as the current Chancellor Jeremy Hunt has to deliver a fiscal statement on 31 October, which will this time include economics and fiscal forecasts from the independent Office for Budgetary Responsibility (OBR).

Initial market response

For now, investors have responded positively to the news. The pound has risen against both the US dollar and the euro, while benchmark 10 and 30-year gilts have seen yields fall (prices rise), and outperforming other government bonds on the day. However, significant challenges remain for the UK, including how the Bank of England responds to this period of chaos while trying to lower inflation, which last month hit a 40-year high.



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