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Markets steady as Sunak becomes PM, but is this the calm before the storm?

UK financial markets gave their verdict on the victory of Rishi Sunak as the next prime minister with 10-year gilt yields dropping 22 basis points and the pound moving higher.
Despite the relative calm unfolding after an extraordinary period of political chaos the UK’s cost of borrowing remains higher than where it stood before the disastrous mini-Budget (23 September).
The proposed unfunded tax cuts, most of which have now been cancelled following the appointment of Jeremy Hunt as chancellor, have possibly done lasting damage to the UK economy.
Internationally, the UK’s reputation will take time to rebuild while the spectre of an earlier general election cannot be ruled out given recent political wranglings.
Fixed income analyst at Carmignac, Michael Michaelides commented: ‘Until the mini-Budget, the UK was perceived as having a best-in-class fiscal framework under the Office of Budget Responsibility (OBR).
‘Its reports are closely scrutinised, and international investors trust its role in monitoring the UK’s fiscal rules.’
Some in the Tory party believe a Sunak and Hunt leadership will do the trick and restore some semblance of order.
Former chancellor George Osbourn said: ‘An uncontested election of Rishi Sunak would reinforce the return of market credibility and show the Tories have rediscovered a will to win.’
OWN GOAL?
Given how fast events have moved it was not a major surprise to see the new fiscal plans and OBR report pushed back, with a full Autumn Statement now scheduled for 17 November.
The UK has one of the largest fiscal deficits in the G7 and a plausible plan to reduce debt while stimulating growth is urgently needed to settle bond and currency markets.
The problem is that damage has already caused by the mini-Budget which has seen mortgage costs surge, threatening millions of household budgets.
Bloomberg economics estimates the UK economy may shrink by 1% over the next year, lowering future tax receipts and removing the government’s flexibility for manoeuvre.
Meanwhile the Bank of England is expected to hike rates by 1% on 3 November and 0.75% at its December meeting as inflation remains in double digits.
Hunt’s watered-down spending plans included backtracking on the energy freeze cap which will now only last until the spring of 2023, adding further to inflationary pressures.
While fiscal and monetary policies pull in opposite directions financial markets will remain volatile as investors price in greater uncertainty.
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