Britain's Prime Minister Liz Truss delivers a speech outside of 10 Downing Street in central London on Oct.20 to announce her resignation. )DANIEL LEAL/AFP/Getty Images
British Prime Minister Liz Truss said on Thursday she would resign as prime minister, and that a leadership contest to choose her successor will be completed by Oct. 28.
Sterling pared the gains made after the announcement of Truss’ statement, and was last up 0.4% at $1.127.
Liz Truss resigns, U.K. markets in turmoil: What’s behind the crisis and what you need to know
Britain’s mid cap stocks index briefly jumped to 1% as Truss said she would step down after just 44 days in office and last traded up 0.4%, while UK blue chips turned negative after the resignation.
Long dated gilts fell. Twenty- and 30-year gilt yields, which had fallen as much as 13 basis points (bps) earlier in the day, were down 3-5 bps.
Bond yields move inversely to prices.
Investor bets on the Bank of England hiking interest rates by 100 basis points next month receded to 8% vs 25% earlier in the day.
Here’s a look at what observers on the Street are saying:
JEREMY STRETCH, HEAD OF G10 FX STRATEGY, CIBC, LONDON:
“I think the question now is all about the parameters of the leadership campaign and trying to understand the profile of the process.”
“What is going to be the threshold to enter the race, for example, how many supporters they’re going to need and who is prepared to throw their hat into the ring – are going to be the next obvious set of questions the market will be asking.
“That might just be the one factor which will preclude cable rallying substantively above the $1.13-$1.1350 area until there’s a bit of clarity in that regard.”
VIRAJ PATEL, GLOBAL MACRO STRATEGIST, VANDA RESEARCH, LONDON:
“Initially, this is likely to take an uncertainty premium out of the market but it depends who takes over, you need a steady hand at the top.”
“My view hasn’t really changed in that the damage we saw from the mini-budget is already done.”
“I still struggle to see a good play for sterling and there’s probably other ways markets will react. Equities should be bouncing here, rates should be moving a bit lower but sterling will likely trade sideways with no strong conviction because the damage has largely been done.”
GILES COGHLAN, CHIEF MARKET ANALYST, HYCM, LONDON:
“After just 44 days in office, it appears that the markets and a party in open revolt have sealed Liz Truss’s fate.”
“Although Truss was brought into usher in an era of growth and ‘trickle-down economics’, her strong pro-growth policy was poorly timed, sending the UK bond markets into a sharp sell off as her policies fanned the flames of surging inflation.”
“To fend off instability, the Bank of England has even intervened in gilt markets, and it remains to be seen whether the central bank will now hike interest rates more quickly.”
KIT JUCKES, MACRO STRATEGIST, SOCIETE GENERALE, LONDON:
“If you told me you were going to get (Rishi) Sunak, (Penny) Mordaunt and (Jeremy) Hunt as the top three running the country, and one of them as prime minister, then I think the markets might turn around and say: ‘Good, we’ve got a credible team and here we go.’ On the other hand you could go in the other direction.”
“If you’ve got someone who looked like they were going to create stability, and in effect deliver the Hunt fiscal plan, I think this means the peak in (interest) rates will be lower than we’ve got priced in. I still think sterling will go down, not up, because rates won’t go as high as traders expect, but I think you’ve probably already seen the low in cable (sterling/dollar).
KENNETH BROUX, CURRENCY STRATEGIST, SOCIETE GENERALE, LONDON:
“The short timescale of the leadership contest is designed to minimize impact for the pound, but you would not want to be long (sterling) until we know who takes over.
“Then on 31 October, the OBR publishes its forecasts. Ideally a fiscal conservative steadies the ship and the credit outlook.
“But the prospects are not great and with the economy on the cusp of recession, it is going to be difficult still for the pound to rally on its own accord.”
STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL
“I think it was not unexpected, but the fact they would not even keep her in power until the 31 October fiscal statement shows how desperate they were to get rid of her.
“But who would want the job now? The markets have largely dictated the direction economic policy has to take and will leave a new PM with little room for manoeuvre in that area.”
LEE HARDMAN, CURRENCY ANALYST, MUFG BANK, LONDON:
“The market reaction is just short-term volatility – it was seen as inevitable given the situation she was in. We will be watching closely who the successor will be but we already have a strong policy in place for tightening fiscal policy, so to some extent it doesn’t matter quite so much who would be coming in next.”
“Whoever comes in will probably be seen as a more credible prime minister than Liz Truss – on the margins, markets would probably like to see someone like Rishi Sunak.”
ANTOINE BOUVET, SENIOR RATES STRATEGIST, ING, LONDON:
“I think there is an underlying assumption that this is going to deliver more political stability and hopefully some political support behind the budget measures that have been announced last week.”
“One week is a relatively short period of time, so in that sense it’s positive, shorter period of uncertainty.”
“In terms of valuation gilts have closed a lot of the gap they opened with Bunds and Treasuries, so as much as there is room for further gains, I think we’ve clearly done most of the tightening.”
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