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The great Truss gamble backfires

First her policies went up in flames, then her brief career as prime minister. The great political gamble of Liz Truss has spectacularly backfired but not before wreaking significant damage to the UK economy.

It will take considerable time before the risk premium attached to UK assets fades away, following the financial nervous breakdown which followed the mini-budget.

Read: Liz Truss resigns as UK prime minister after tax-cut plan backfires

With a political implosion seemingly imminent, and expectations rising that Truss’ minutes in power were numbered, the pound crept up in value, heading back towards $1.13 (on Thursday). As she gave her resignation statement, it largely held onto gains.

Sterling is highly sensitive to economic policy uncertainty and even though the ship Britannia will still be left largely rudderless, with a successor still to be chosen, as far as investors are concerned, the future is marginally brighter without her in charge.

Ten-year gilt yields eased further on Thursday (20 October), as speculation soared about her resignation, a sign of tacit approval from the bond vigilantes who punished the UK by deserting its government’s debt as worries raced up about fiscal responsibility.

However, on the equity markets, news of Truss quitting was met with another bout of nervousness, as political uncertainty conspired with worries about the impact of recession.

With the third prime minister in just a year expected to be announced by the end of the month, the UK will still be viewed in financial markets as politically unstable.

What investors crave is more steadiness and reliability but until they know who will take charge and lead an economic recovery, that stability still remains highly elusive which means that neither sterling nor stocks are likely to make any big strides of progress.’

  • Susannah Streeter is senior investment and markets analyst at Hargreaves Lansdown

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