‘Markets Are Calling the Shots:’ UK Traders React to Truss Exit

Prime Minister Liz Truss announces her resignation as she addresses the media outside number 10 at Downing Street on October 20, 2022 in London, England.

(Bloomberg) --

This month of 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.

In interviews on Thursday, 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 $1.12, and the yield on UK 10-year gilts was near levels before the mini-budget was announced last month. The FTSE 250 Index rallied 0.9%.

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

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.

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 of the Exchequer Rishi Sunak -- runner-up to Truss in this summer's leadership contest. Other contenders then are also likely to be in the fray, including Penny Mordaunt, Grant Shapps and Kemi Badenoch.

Here's what other investors had to say:

Robert Alster, chief investment officer at Close Brothers Asset Management:

“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.”

Chris Beauchamp, chief market analyst at IG Group:

“An initial bounce in the pound has begun to fade, as the implications of yet another period of uncertainty sink in. But given how quick the change is expected, and with the chancellor likely to stay in place, we should expect market tensions to calm.”

“In all likelihood Rishi is ready to step in, and with Hunt in alignment with him, we can expect a very different approach, but one more likely to please markets.”

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence.

“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.”

Rishi Mishra, an analyst at Futures First:

“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 GmbH:

“A serious solution must be found rather quickly to calm markets as political disagreement is poison for confidence in the market.”

“In our view, the market's preferred replacement would be Rishi Sunak, who is a known quantity and has managed the country's finances well during the Covid pandemic.”

Alessandro Barison, a portfolio manager at HI Numen Credit Fund

“Truss leaving does not change the impact of the energy crisis and hyperinflation in UK.”

“A more credible government might decrease the UK risk perception, but doesn't change the energy picture. After an initial rally in gilts, we wonder who is the marginal international buyer of UK assets to finance government and trade deficit. A lower fiscal deficit than under Truss means lower growth. We are bearish on gilts, UK credit and UK banks.”

Esty Dwek, chief investment officer at Flowbank SA

“It does feel like we have seen the worst of it right now, at least in terms of fiscal risks, given the U-turns we've seen in recent weeks, but uncertainty is not going to end as the possibility of a general election will continue to loom over markets for some time. There might be some initial relief in assets as Truss had lost her power anyway, but the direction of the country remains up in the air.”

--With assistance from , , , and .

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