— This is the script of CNBC’s financial news report for China’s CCTV on October 21, 2022.
A key reason for Truss’ resignation was her expansionary fiscal policy, which caused wild market volatility and triggered a “catastrophe.” To calm the market storm, Truss abandoned most of her economic ideas. Because of this drastic repetition, the party’s approval rating plummeted.
We can use the UK 30-year bond to see how the market has reacted to Truss’ election as Prime Minister since September 21st. We can see that every policy adjustment has caused the bond market to experience turbulent ups and downs.
The market’s reaction has been described by Gillian Tett, a Financial Times editor, as “the return of Bond vigilantes”. This phenomenon leads investors dissatisfied with the programs of the government to sell government bonds on a large scale, raising the cost of borrowing and thus fighting against the policies of those in power.
Gillian Tett
Editor-in-Chief of the Financial Times
“The financial markets were very crucial in this story. In fact, one can even say that the Bond vigilantes are back. What do you have as political unrest, you have financial risks, you have political uncertainty.”
Rising bond yields have led to a liquidity squeeze for many UK pension funds, which have used extensive financial leverage.
As such, we saw a positive market reaction after Truss announced his retirement as FX and bond markets rallied.
Investors see Truss’ resignation as a step forward for the UK government to restore credibility in financial markets. Nonetheless, the next prime minister faces an extremely challenging task: the cost of living crisis, the cost of credit crisis and the market credibility crisis. The market is most concerned about who will be the next British Prime Minister.
According to Smarkets, former Chancellor of the Exchequer Rishi Sunak has the highest probability of being elected at over 40%. Next, Speaker of the House of Commons Penny Mordaunt and Secretary of Defense Ben Wallace are strong candidates. Boris Johnson, who recently lost his position as prime minister, could also make a comeback.
Some analysts believe it will be a game between populists and technocrats, with Johnson and Truss both being populists. The new Chancellor of the Exchequer, Hunt and Sunac, on the other hand, belong to the more sober and quiet technocratic school, which may lack charisma but has the credibility of the market, and regaining the confidence of the financial markets will be crucial for the next prime minister.
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