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Pound up and gilt yields retreat as Rishi Sunak set to land PM job

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24/10/2022
The former Chancellor Rishi Sunak has “markets on his side” as the pound has risen while gilts yields have fallen back as it seems he’s on course to land the Prime Minister position.

His rival – and former PM – Boris Johnson bowed out from the race last night, leaving Sunak and Penny Mordaunt as the last two candidates for the top job.

Following Johnson’s decision not to stand again, the FTSE 100 “opened flat, shrugging off the latest political developments”, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said.

Streeter added “the cult of Boris has for now been broken, sending the pound higher, after the former Prime Minister said he would not stand again.

“He had threatened to cause fresh political instability, given that it’s less than two months since he left the job, so his retreat from the race brought a sigh of relief for sterling and an even bigger sigh of relief on the bond markets.”

The pound is up by more than 0.6% to $1.136 as Sunak is favourite to take on the PM role. Meanwhile, 10-year gilt yields have fallen back sharply from above 4% on Friday to 3.8% on early trading today.

“It’s an indication that bond vigilantes have been pacified by the expectations of a calmer political horizon ahead with fiscal responsibility forecast to be the new mantra of the income Prime Minister,” Streeter added.

Economic and political stability

Danni Hewson, financial analyst at AJ Bell, said after Johnson’s move to pull out, domestic-facing sectors like housebuilders and banks are also in demand and the FTSE 250, which has a more domestic focus than the FTSE 100, “is also materially higher”.

Hewson said: “Investors clearly hope Sunak will stabilise the economy and the political situation – though it’s hard to work out at this point which is the harder task.

“Assuming Sunak gets his coronation later today, attention will likely turn to the new fiscal plan set to be announced a week today on Halloween. Clearly the aim will be to avoid doing anything which might spook the market.

“As well as the recovery in sterling and the reduced cost of government borrowing, Sunak will be pleased to see European gas prices going in the right direction thanks to mild temperatures across the continent. And while the outlook is still filled with dark clouds, for the first time in a while it is possible to spy a chink of light.”

On Thursday, Liz Truss resigned as leader of the Conservatives and Prime Minister, after just six weeks in the top job on account of the market turmoil caused by her ‘Trussonomics’ policy of stealth tax cuts. It led to investor panic, sent the pound crashing against the dollar, sent gilt yields and mortgage rates soaring and resulted in Kwasi Kwarteng being sacked as the Chancellor.

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