Financial markets after Truss’s resignation: trust needs to be rebuilt

After the severe market turbulence of the past few weeks, investors are now waiting to see how things will continue in Great Britain. The poor economic situation in the country continues to create uncertainty

All in all, after the resignation of British Prime Minister Liz Truss, the reaction on the financial markets has remained “fairly muted” – in other words, quite muted, as one British analyst puts it. Investors are now waiting to see what comes next.

The truss government, which lasted almost six weeks, caused wild ups and downs on the financial markets. As a look at the price table of the index of the 100 largest listed companies in Great Britain shows, which closed slightly higher yesterday. The FTSE 100 has zigzagged lower since Truss took office in early September as UK government bond yields rose and the pound continued to weaken.

The pound could continue to fluctuate wildly

Even longtime stock market professionals in the City of London have never experienced anything like this, as CMC Markets chief analyst Michael Hewson told the BBC reports: “The events of the past two or three weeks – I’m already losing track of time – have been very extraordinary. And just after the PM announced her resignation, we are already seeing a positive reaction in the bond market and a positive reaction in the pound.”

The pound rebounded against the US dollar shortly after Trus’ announcement, temporarily climbing above $1.13 before falling back to $1.11. The British currency was back down to $1.14 at the start of trading today. Currency experts such as Sonja Marten from DZ Bank believe that things could continue to be so volatile, because the fundamental uncertainty in the face of an impending economic downturn in Great Britain remains.

Holger Schmieding, chief economist at Berenberg Bank, explains the market turbulence of the past few weeks tagesschau.de like this: “This tells us that international investors, the people on the financial markets, have lost a bit of confidence in Great Britain. This trust had already been shattered by Brexit, a decision that was often difficult to understand outside of Great Britain and which is also bad for the country economically.”

Raise taxes rather than lower them?

In this situation, the Truss government wanted to boost growth on credit, while at the same time lowering taxes on a large scale for companies – and financing the whole thing with debt. The financial markets reacted unequivocally, investors fled British government bonds, and the state had to pay more to borrow. The Bank of England stepped in and bought up the debt securities.

With Truss’ resignation, the plans are off the table for the time being. The government must first ensure trust, says Martin Lück, capital market strategist at asset manager Blackrock. “And the best way to win back this trust is to present a solid budget that is solidly financed.” The successor in Downing Street must therefore think more about raising taxes than lowering them.

More will be known on October 31, when the UK Treasury Secretary Jeremy Hunt will present his fiscal policy plans.