Investment reaction to Truss’s resignation

After 44 days in office, Liz Truss announced her decision to leave 10 Downing Street today (20 October).

Her successor will be named during a short Tory election, which is due to take place before the end of next week.

Markets welcomed Truss with reserve as she took office, with many already sceptical of her projected fiscal policies.

The end for Truss started when the mini budget on Friday 23 September, which delivered what markets were fearing.

Unsurprisingly, her departure has caused little commotion in the markets.

Royal London Asset Management head of multi asset Trevor Greetham: “Market reaction to Liz Truss’s resignation has been very muted.

“It isn’t a great surprise and most of the planned tax cuts that upset the bond market were abandoned when Jeremy Hunt took office as chancellor.

“The best outcome for markets would be a rapid rallying of the parliamentary Conservative party around a single candidate who would validate Hunt’s approach and the timing of the 31 October report from the Office for Budget Responsibility.”

Albemarle Street Partners managing director Charlie Parker: “Britain tried an experiment with unfunded spending in the belief that the markets would support us unconditionally. But we discovered that we are no longer a global superpower that, like the United States, can count on the support of markets whatever policies we attempt.

“There is no doubt that this has reflected badly upon the UK as a source for international investment. Yet we can draw one key positive from all of this. Britain only very occasionally tries experiments with economic radicalism – 1976, 1992 and 2022. What characterises all these crises is an inability to properly grasp our dependence on volatile market sentiment. Yet we can be pleased that there are big gaps between each of these episodes.

“Now the attempt at radical spending has been tried and found to fail it is likely that it will be many many years before it is tried again, by either the left or the right. This reduces the risk of unfunded spending in future from either major party.

“For this reason, we could conclude that now we have got this episode out of the way, perhaps gilts should no longer trade at a premium to other developed market bonds? Particularly as some of those other developed markets may yet themselves try such a radical experiment.

“Ultimately the last week has reminded us that whilst politicians can say all sorts of strange things to their supporters and keep their support, they cannot do this to financial markets. Financial markets are the hard wall that post-truth politics crashes against, the ultimate lie detector.

“As we look forward to the statement on 31 October, perhaps the most complex debate relating to economic growth will become immigration. Probably the only initiative that an incoming prime minister could take in the short-term to improve the Office of Budget Responsibility’s assessment of growth would be to significantly ease immigration, allowing greater capacity in the economy without driving up wages. This though will be anathema to the right of the Tory party. Only time will tell whether an incoming prime minister will be bold enough to take this step.”

AJ Bell financial analyst Danni Hewson: “To use a phrase that has no doubt been exhausted in the past few weeks, markets don’t like uncertainty. And losing another prime minister in the midst of a cost-of-living crisis is far from ideal. But Liz Truss’s credibility with markets was shattered when her former chancellor unveiled the mini-budget which effectively lit the touch paper on an explosive period for politics and demonstrated the importance of taking markets with you when it comes to fiscal policy.

“Sterling received a boost against the dollar on the speculation that resignation was imminent and the yield on 30-year gilts was nudged down, but the reality that number 10 is once again in need of a new inhabitant has led to minute by minute fluctuations.

“Now the ‘will she, won’t she’ part has been taken out of investor equations the FTSE 250 has rallied and with the prosect of a firm hand on the tiller, markets are now anticipating the Bank of England won’t have to raise rates as far or as fast when they meet next month.

“There are big questions to be answered and they need to be answered quickly. The Conservative Party is promising a quick appointment within days, crucially ahead of the fiscal event scheduled for Halloween.

“And for markets that’s really the key issue – that the independent economic health check needs to be published and policy needs to stand. There can be no more vacillating, dithering or U-turns.

“Volatility which has been a hallmark of global markets this year is most definitely here to stay in UK markets, at least for now. Time is short and credibility is on the line, but it is ordinary people’s finances that should be the priority.”

7IM senior investment strategist Ben Kumar: “There’s a Taoist proverb; ‘The candle that burns twice as bright, burns half as long’.

“Liz Truss’s time as prime minister was basically a flash fire – over quite quickly, but causing a lot of damage while it burnt.

“Technically, the bond [the 40 year UK inflation-inked bond] ‘only’ lost 15% in value over the course of her time in Number 10 (although that’s not exactly a five star review …).

“But really the story has been about the journey. For the debt of an established Western democratic nation to fall and rise by double and triple digit percentages multiple times over a six week period is unprecedented.

“It leaves the next holder of the office an even harder task than Truss was faced with – all of the previous challenges remain (inflation, energy prices, growth, climate change, healthcare) but with the added issue of a lack of confidence – from financial markets and from the electorate.

“Since the beginning of summer, we’ve had four chancellors, three home secretaries and two prime ministers. And we’re not even done yet. By the end of next week those tallies will change again. It’s too early to say what the next iteration of UK government will look like. While we only have to wait a week, as we keep finding out, that can be a long time in politics.”

City Index senior financial markets analyst Fiona Cincotta:  “GBP/USD is rebounding, rising off session lows after PM Liz Truss resigned.

“After just 45 days in power, one of the shortest tenures in UK history, the floor will once again been opened with the next leader due to be selected in one week.

“The pound’s rally is a sign of relief that  Trussonomics has come to an end. After the chaos of the last few weeks, Truss’s exit from office was almost a given. However this is unlikely to mark a meaningful turnaround in the pound.

“The big question is, who is prepared to fill the position? Former Chancellor Rishi Sunak has said initially he is not interested. If the candidates take too long to appear the pound could get nervous.”

Federated Hermes Limited senior fixed income portfolio manager Orla Garvey: “The market has barely reacted to Liz Truss’s resignation so far and that’s because we will more than likely go back to a more orthodox fiscal stance, which has been priced in over the last few sessions following Jeremy Hunt’s appointment as chancellor.

“At some point in the next week or so we will know who exactly is in the running for the job of prime minister. We don’t expect this knowledge to be massively market moving, unless some of the candidates are deemed to be more radical in terms of their fiscal outlook, which seems unlikely.

“More important moments will be the Budget on the 31, the start of quantitative tightening on 1 November and the long list of developed market central bank decisions coming up in the next two weeks – in China, Europe, Japan, Australia, the US and the UK – following the upside inflation prints released recently.”