Hope for stability as Rishi Sunak named prime minister

Sterling and bond markets ticked up on news of his victory in the Tory leadership race

Copyright: Flickr/ MHCLG


Rishi Sunak is the new leader of the Conservative Party and will become the UK’s third prime minister this year. After weeks of economic and political turmoil, Sunak was by far the most supported candidate among MPs, after the withdrawals of Penny Mordaunt and Boris Johnson. Sunak has since called for unity in facing the “profound” economic challenges that lie before the UK.

While #RishiOut was trending on Twitter just hours after his victory was confirmed, amid growing calls for a general election, markets responded rather more positively to the news. Edward Park, CIO at Brooks Macdonald, observed that sterling rallied on news that Johnson had exited the contest, and while it is too early to conclude whether Sunak will be successful in his bid to unify the Tories, Park regards him as a safe pair of hands economically, as well as someone who will work in partnership with the Bank of England to restore the UK’s finances.

Gilt yields fell sharply on signs that the more fiscally conservative Sunak was set to become Tory leader; 10-year UK gilt yields remain well below 4% at 3.82%, one of their lowest levels in a month. The lower gilt yields have positive implications for UK government borrowing costs, and a new fiscal outlook may allow the BoE to be less aggressive with their interest rate policy.

Park, like many others, sees this as an opportunity for stability. He believed that a Sunak and Jeremy Hunt alliance would be welcomed by financial markets eager to move on from a tumultuous month of political chaos. At the time of writing, it is not yet confirmed that Hunt will remain chancellor, although many expect it.

In tackling the questions about the implications of a softer BoE stance for the strength of sterling, he said: “A more stable political environment is likely to trump any concerns that currency traders have over a less hawkish Bank of England.”

Vince Hopkins, head of business development at BRI Wealth Management, also sees the recent developments as a small step towards restoring credibility, and thus stability. He was in little doubt that, once Johnson had withdrawn, Sunak would become the new prime minister, and he subsequently observed that markets and sterling started the day “in positive territory”. The more UK-focused FTSE 250 index was also up 1.3% just after the 2pm confirmation of Sunak as Tory leader.

Monday’s market movements contrasted strongly with the nervousness that defined last week, when the identity of the future prime minister was still unclear. Abrdn investment director James Athey noted that the similarity between the economic package laid out by Hunt, and that on which Sunak campaigned during the summer, meant that another U-turn would have been possible had Sunak not won this time around.

However, now that Sunak is nailed on to become PM, there is no longer a requirement to roll the dice with the Tory members, and Athey believes Sunak’s swift appointment is the most market-friendly, short-term outcome.

While a feeling of cautious positivity has met news of Sunak’s victory, there is widespread acknowledgement that this has not put an end to the economic uncertainty.

Morningstar’s UK editor Ollie Smith said, despite this pending clarity, it is not yet clear where Sunak stands on economic matters, or whether indeed he will keep Hunt as his chancellor. He added: “Himself a former chancellor, Sunak has given no interviews or statements to the press since the prospect of him becoming prime minister looked like a serious possibility over the weekend.” Sunak is yet to confirm his fiscal plans, and the market nervousness of last week is unlikely to be assuaged until the government’s medium-term fiscal plan on 31 October and subsequent budget on 23 November.

Abrdn’s Athey summarised the mood succinctly: “The economic future, however, remains fraught; inflation remains far too high, and the Bank of England hasn’t yet really grasped the nettle.” As such, he says, the future is far from ideal for UK investors.