The UK's next prime minister Rishi Sunak will enjoy a honeymoon period and a relief rally in the markets as he takes on the role tomorrow (25 October), but experts have warned that it may be short-lived.
The former UK chancellor has been successful in his bid to become the new Conservative Party leader and thus next Prime Minister, replacing Liz Truss, who resigned on 20 October after just 44 days in office, reports Investment Week.
The news has spared markets any additional uncertainty today, with sterling edging higher after the announcement and falling gilt yields bringing hope that borrowing costs may continue to ease.
Ten-year gilt yields are down 6% to 3.8%, while two-year gilt yields have decreased to 3.3%, from 3.8% last Friday. Sterling is broadly flat on the day at $1.13, having retraced slightly after reaching an intraday high of $1.1376.
Meanwhile, the FTSE UK's main equity indexes reached session highs. The blue-chip FTSE 100 rose 0.6%, while the domestically focussed FTSE 250 index jumped 1.3%.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, said that Sunak will be determined "not to see the bond market run amok again", threatening the country's financial stability.
"He will be revelling in the fact that his curriculum of higher taxes and curtailed spending, which he preached on the campaign trail, is already being followed," she said.
"However, it is likely he will take an even harder line now on government budgets, given the punishment threatened to be handed out again comes in the form of much higher government borrowing costs.
He will also want to show he is cooperating with the Bank of England "by being ultra conservative" fiscally in a bid to tame high inflation, she added.
James Athey, investment director at abrdn, said the speed with which the new PM can now enter number 10 make this outcome the most "market friendly one that was possible in the short term".
However, he said that the economic future however remains fraught, inflation remains far too high and the Bank of England has not "yet really grasped the nettle". As such, he noted that the future is "far from ideal" for UK investors.
Nigel Green, CEO of deVere Group, said that although Sunak is seen as having a "safer pair of hands" than his predecessor, the current relief rally of the markets will be "over sooner rather than later" because the UK still faces a "storm of economic problems".
"There is the brewing deep and painful recession, soaring energy prices, inflation running at more than 10%, labour gaps, ongoing supply chain dramas, and the Bank of England intent on hiking interest rates," he said.
A timeline of turmoil for Truss
In the short term, the appointment of Rishi Sunak as the UK's next PM may lessen some of the pressure and volatility in the gilt market but "fundamental issues remain for the medium term", said Piero Cingari, market specialist at Capital.com.
"The Bank of England still faces a tricky balancing act — on the one hand, the BoE still needs to raise rates materially from here especially as inflation is likely to climb further. This might continue to exert upward pressure on gilt yields," he said.
"On the other hand a rising rate environment might increase the prospect of a recession, declining real incomes and softening demand in the economy—all of which will likely add further pressure on the pound."
