U.K Markets Shrug at Prime Minister’s Exit After Six Weeks

Financial markets mostly shrugged Thursday after U.K. Prime Minister Liz Truss said she will resign next week amid a Conservative Party revolt against her leadership.

It was a far cry from the market response to the Truss government’s initial fiscal blueprint, which sent the British pound to a record low against the U.S. dollar, prompted emergency intervention in a slumping bond market by the Bank of England, and drew criticism from the International Monetary Fund. 

Though the top-heavy tax cuts Truss had proposed have since been canceled, her standing never recovered, with 80% of Britons rating her unfavorably in one poll this week. Truss proved  right recent press predictions likening her shelf life to that of a lettuce by announcing she would leave next week, concluding the shortest tenure by a UK prime minister in history. 

Among the leading candidates to replace her are Boris Johnson, the former prime minister Truss succeeded just last month after another party revolt, and Rishi Sunak, the former chancellor (the equivalent of finance minister or Treasury secretary) who called Truss’s plans “fantasy economics” before she beat him in the contest to succeed his boss.

The pound surrendered early gains to trade marginally lower against the dollar by 3:40 p.m. ET. At $1.12, the pound was up from its record intraday low of $1.03 on Sept. 26, but down from $1.35 at the end of last year and a bit off the $1.15 level when Truss became prime minister on Sept. 6.

The yield on 10-year UK government bonds rose 3 basis points to 3.89%. The yield was 3.1% the day Truss took office and 4.51% just three weeks later. That sell-off followed a supplemental government budget that would have cut taxes for the wealthy as the primary strategy for propping up economic growth amid an energy crisis.

The selling began to feed on itself as U.K. pension fund managers pursuing liability driven investment strategies, which employ leverage and derivatives, faced demands for additional collateral and sold bonds as a result. That prompted the Bank of England to pledge to buy U.K. bonds for a limited time, despite longer-term plans to pare the central bank’s holdings.

“Although Truss was brought in to 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 inflaton,” said Giles Coghlan, chief market analyst for UK foreign exchange broker HYCM.

“Truss’s departure is likely to be mildly GBP positive, depending on her successor for the premiership. Already, the UK gilt [bond] market was supported as rumors of the prime minister’s resignation came to light this morning, which is a good sign for the pound’s stability.”

The Bottom Line

The next U.K. prime minister will inherit many of the problems that confronted Truss, including soaring energy costs, high inflation, and slowing economic growth. Her successor will lead an unpopular government with limited means to address the country’s current problems.