Liz Truss Resigns As UK Prime Minister. What’s Next For Volatile Financial Markets?

On Thursday, UK prime minister Liz Truss bowed to mounting pressure and resigned as prime minister of the United Kingdom.

Truss lasted just 44 days in the top job. Her first major act was the launch of her mini-budget in late September which promised billions of pounds of unfunded tax cuts as well as a cap on energy prices.

Her plans sank sterling, pushing the British currency to record lows against the US dollar at one point. They also caused yields on UK gilts to soar and drove share prices across the London Stock Exchange lower.

She since reversed course — a trajectory which saw her jettison her Chancellor of the Exchequer, Kwasi Kwarteng — but she failed to regain her authority and calls for her departure had been steadily growing.

Uncertainty Set To Continue

Following Truss’ resignation today the pound has risen against other major currencies like the dollar and euro. Meanwhile, the FTSE 250 — a stock index which is highly geared to the UK economy — temporarily spiked before falling back again.

The political landscape in Britain is plagued with uncertainty. Conservative MPs seem likely to select a new prime minister by the end of next week. Though given the huge divisions in the ruling party, a general election before the end of the year is also a strong possibility.

Short-Lived Rally?

So what can we expect from financial markets in the days and weeks ahead?

Nigel Green, chief executive of financial advisory firm deVere Group, has said “I fear that market volatility will not be over despite the resignation of Liz Truss, whose leadership campaign lasted 10 days longer than [her] premiership.”

Green said that “there will be a relief rally in markets now that Truss has confirmed her departure.” However, he warns that “it will be short-lived as political upheaval remains.”

He predicted that “the pound, gilt markets, amongst others, will remain under pressure for the foreseeable future.”

Green points to consumer price inflation hitting 10.1% in September, and noted that “[the UK] economy resembles that of an emerging market, not a G7 nation.”

He said too that “investors know that the political chaos that has defined the UK throughout 2022 is nowhere near over,” adding that “this fuels uncertainty and drives turbulence in financial markets.”

No Significant Progress?

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that “the great political gamble of Liz Truss has spectacularly backfired but not before wreaking significant damage to the UK economy.”

She predicted that “it will take considerable time before the risk premium attached to UK assets fades away, following the financial nervous breakdown which followed the mini-budget.”

Streeter said that “the UK will still be viewed in financial markets as politically unstable” as the country lines up its third prime minister since the summer.

“What investors crave is more steadiness and reliability but until they know who will take charge and lead an economic recovery, that stability still remains highly elusive, which means that neither sterling nor stocks are likely to make any big strides of progress.”

Sterling ‘Snakes and Ladders’

William Marsters, senior UK sales trader at Saxo, commented that “though many will be glad to see the back of Trussenomics, the announcement of a Tory leadership contest next week leads to more uncertainty on who could be next in No.10.”

Marsters added that “sterling’s game of snakes and ladders is far from over,” commenting that “it’s unlikely that the pound will show many signs of long-term recovery.”

He noted that the UK economy continues to be battered by high inflation “which has led to crippling everyday costs affecting households and businesses.”

The Brexit Question

George Lagarias, chief economist at accountancy firm Mazars, advised that “markets may initially have reacted positively to Ms Truss’s resignation, but volatility should be expected to continue until the country is again on a sound footing.”

Lagarias added that observers need to consider the bigger picture “of whether Brexit Britain can deliver on its promises to both the electorate and its key economic stakeholders in a financially illiquid environment,” or whether “a wider course correction [is] required to restore growth.”