Pound rises over $1.13

The pound has now rallied higher, up one cent to $1.132 against the US dollar.

Sterling pushed higher amid reports that former chancellor Rishi Sunak, who warned against Liz Truss’s tax-cutting plans, is ‘certain’ to stand in the leadership battle, according to the Telegraph.


— Carl Quintanilla (@carlquintanilla) October 20, 2022

Key events

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Philip Shaw of Investec wins a small prize for the title of his analyst note on today’s political turmoil:

Britannia Untrussed – Britain heads for third PM this year

  • Following a chaos-strewn 45 days as Prime Minister, PM Liz Truss stood down today, stating that she could not deliver the mandate on which she was elected by Conservative Party members. Indeed even the past week has been filled with turmoil, starting with the sacking of Chancellor Kwasi Kwarteng last Friday and culminating yesterday in the departure of Home Secretary Suella Braverman and total confusion among Tory MPs in the House of Commons over a vote on fracking.

  • By contrast with the political situation, conditions in markets have calmed down over the past week or so. At the time of writing, ten-year gilt yields are 43bps points are lower since last week’s close and 30-year yields down 81bps (helped by the Bank of England stating that for now, it will not sell gilts of more than 20 years’ maturity in its Quantitative Tightening operations, which it plans to start from 1 November). Sterling is also a touch higher [now $1.131].

  • The critical point here is that new Chancellor Jeremy Hunt acted quickly to reassure markets on Monday morning, making it clear that he would jettison almost all of Kwarteng’s unfunded tax cuts, saving £32bn per annum. He also announced that Truss’s plan to freeze the domestic energy price cap at £2,500 would be curtailed from two years to six months, with a (yet to be decided) more targeted scheme to replace it in April next year. Furthermore Hunt stated that additional painful decisions need to be made both in terms of taxation and public spending.

  • The Budget on 31 October has therefore become a critical event. Interest rate markets have rallied to price in a lower peak in the Bank rate, from 6.25% in late September to a touch above 5.00% now, but after the events of the past month and a half, the reputation of the UK remains on the line. While credibility is easily lost, it can take a very long time for it to be regained. In this respect markets will consider it essential for the Chancellor to be able to carry through his plans to bring the UK back on course to meet its fiscal rules.

Eurasia: Sunak and Mordaunt the front-runners

Mujtaba Rahman, managing director for Europe at Eurasia Group, thinks Rishi Sunak is the most likely candidate to replace Liz Truss, followed by Penny Mordaunt (who came third in the MP’s ballot last time).

Rahman also sees a 10% chance of a general election:

Some senior Tories will now urge contenders to reach agreement on a “coronation”. But for now, both Sunak and Mordaunt appear unwilling to stand aside for each other. Braverman might also insist on her right to stand. If she secured a place in a run-off among the members, the election of Truss this summer suggests that Braverman would have a chance of winning. But we suspect the final two in this scenario would be Sunak and Mordaunt.

Sunak would start as the front-runner, due to his greater experience than Mordaunt, but he has enemies among MPs loyal to Johnson and Truss, who might try to scupper his bid.

We assign a 35% chance of Sunak becoming PM; 30% for Mordaunt; 15% for Braverman; 15% Badenoch and 5% for Johnson. We continue to think a general election is unlikely but raise the odds from 5% to 10% due to fears, shared by some ministers, that the party’s mutinous MPs have become “ungovernable.”

Steven Swinford of The Times, though, says there are questions about whether the fiscal event will have to be delayed beyond 31 October, given the leadership contest.


There are questions about whether Oct 31 fiscal event will be delayed given leadership contest

Treasury still working to date – OBR forecasts seen as key to Bank interest rate decision on Nov 3

But decisions will define whoever wins contesthttps://t.co/SuApE3RmIr

— Steven Swinford (@Steven_Swinford) October 20, 2022

Fiscal plan announcement still scheduled for 31 October

Richard Partington

The Treasury has confirmed the government will push ahead with plans for holding a debt-cutting announcement on 31 October as planned, although any final decision to proceed will be the responsibility of the incoming prime minister.

Jeremy Hunt has indicated he will not run for prime minister.

The chancellor is expected to announce cuts to public spending, after U-turning on almost all of Liz Truss’ unfunded tax cuts contained in last month’s ill-fated mini budget.

What a tricky spot the BOE are in. They are supposed to make a huge interest rate decision on Nov3- unclear what fiscal plans will be & who will be Chancellor (if indeed Hunt stays on) + how new gov may address energy plans which are due to expire April (=bump for inflation)

— Joumanna Bercetche 🇱🇧 (@CNBCJou) October 20, 2022

Another leadership contest!
Worth noting that since Chancellor Hunt’s comments on Monday 30y gilts are almost 100bps lower (!)

Incoming government will inherit a pile of U-turns to deliver on, but also have the tall task of restoring credibility $GBP

— Joumanna Bercetche 🇱🇧 (@CNBCJou) October 20, 2022

Pound rises over $1.13

The pound has now rallied higher, up one cent to $1.132 against the US dollar.

Sterling pushed higher amid reports that former chancellor Rishi Sunak, who warned against Liz Truss’s tax-cutting plans, is ‘certain’ to stand in the leadership battle, according to the Telegraph.


— Carl Quintanilla (@carlquintanilla) October 20, 2022

BlueBay: Electing Sunak could help erase UK’s ‘risk premium’

Electing Rishi Sunak as prime minister would be the best way to remove the ‘risk premium’ that is hurting UK bonds, and the pound.

So explains Neil Mehta, portfolio manager at asset manager BlueBay

A political reset would continue to erase the risk-premium embedded in UK assets after the ill-fated Truss/Kwarteng mini-budget.

Particularly if front-runner Rishi Sunak becomes PM and implements more orthodox conservative economic policy. With Jeremy Hunt as chancellor, we could see a more meaningful shift towards a more centrist government, with more focus on the economy rather than populist areas such as migration and Brexit.

This will likely embolden Gilts and the pound, but the longer terms challenges facing the UK economy on cost of living and inflation will unlikely abate – with a Labour government in the waiting.

After the last few weeks of complete chaos and dysfunctional government, UK firms are pleading for some calm, and actual help to get them through the tough winter.

Martin McTague, National Chair of the Federation of Small Businesses, says Liz Truss’s successor needs to secure economic growth and improve the economy:

“It is incumbent upon the next Conservative Party leader to show they can provide stability and take the necessary steps to secure economic growth in the face of significant recessionary pressures.

Businesses are crying out for an end to the political turmoil and a focus on remedying the economy, supporting small firms through the hard winter ahead.

“Whoever becomes Prime Minister must knuckle down, see through the delivery of the energy support package for small businesses – as already approved by Parliament – and the reversal of the hike in National Insurance.

“Beyond that there must be a focus on securing prosperity for the longer term, making sure we have the right support for improving broadband, housebuilding, labour supply, and the tax and regulatory framework – so we can build our way out of the increasingly negative economic climate.”

The pound is slightly higher against the euro today, up 0.1% at €1.1484.

It had fallen to €1.142, before starting to rally this afternoon even before the official announcement:

EUR/GBP only slightly lower after UK PM Liz Truss announced her resignation. Most of the move lower was already penciled in during the afternoon as rumours of resignation took off $EURGBP pic.twitter.com/6iIEjhMMlk

— Kirstine Kundby-Nielsen (@KirstineKundby) October 20, 2022

The resignation of the prime minister after just six weeks, following mounting chaos and financial turmoil, does not make Britain a particularly attractive place to invest.

Jason Paltrowitz, director at US financial services group OTC Markets, says its hard for American investors to put money into the UK at the moment:

From the US, early reaction to the PM’s resignation fits the recent narrative that the lack of political certainty is proving difficult for UK equities and subsequent valuations.

It will therefore continue to be difficult for US investors to participate and look at future buying opportunities without clarity soon.

Analyst: Conservatives must choose new leader quickly

Sam North, market analyst at eToro, says the current economic crisis warrants fast action from the Conservative Party to elect a new leader.

“The longer a race takes, the more turmoil there could be for markets. UK gilts and GBP have reacted somewhat to her resignation, but we haven’t yet seen a big move. This might begin to change if the contest drags on.

“Chancellor Jeremy Hunt is due to deliver a new Budget and OBR forecast on Halloween, but there is plenty of time for markets to spook before that, making his job tougher, and worsening conditions for households in terms of inflation and interest rate expectations and ensuing tax implications.”

Timings wise, Sir Graham Brady, the chair of the 1922 Committee, has said it will be possible to conduct a leadership ballot by 28 October.

He says:

I have spoken to the party chairman, Jake Berry, and he has confirmed that it will be possible to conduct a ballot and conclude a leadership election by Friday the 28 October.

So we should have a new leader in place before the fiscal statement which will take place on the 31st.

Our Politics Live blog reports that Suella Braverman, the former home secretary, and trade secretary Kemi Badenoch are expected to stand, but that Jeremy Hunt and Michael Gove are not.

Update: Former British prime minister Boris Johnson is expected to stand too.


I’m told that Boris Johnson is expected to stand in the Tory leadership contest

He’s taking soundings but is said to believe it is a matter of national interesthttps://t.co/SuApE3RmIr

— Steven Swinford (@Steven_Swinford) October 20, 2022

Capital Economic: New PM must work hard to restore credibility

Although the resignation of Liz Truss as Prime Minister leaves the UK without a leader when it faces huge economic, fiscal and financial market challenges, the markets appear to be relieved, writes Paul Dales, chief UK economist at Capital Economics.

The pound has climbed from $1.12 to $1.13 and 30-year gilt yields have fallen further from 3.95% to 3.90%.

In other words, the markets are further pricing out the risk premium that the Truss government generated. There is still a lot of uncertainty, but the lesson surely is that the economic, fiscal and financial market backdrop matters.

Dales also points out that fiscal policy has swung from being ultra loose, to less loose to outright tight in just a few weeks, as Jeremy Hunt took charge of the Treasury and “almost wiped from history” the tax policies of Truss and Kwasi Kwarteng.

But the new Prime Minister and their Chancellor have a big task to navigate the economy through “the cost of living crisis, cost of borrowing crisis and the cost of credibility crisis”, Dales concludes.

Liz Truss’s departure should help calm the markets, predicts 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.

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