Long road ahead to put salad jokes in the past

UK markets are upbeat but not rattling higher in the wake of Liz Truss’s resignation as prime minister. To understand why, the clue is in the lettuce.

The Daily Star tabloid plonked an iceberg lettuce with googly eyes and a blonde wig on a table next to a picture of Truss on October 14 and streamed it on the internet to see which would last longer — the lettuce or Truss’s premiership. Against the odds, given the warm wig and the apparent lack of refrigeration, the lettuce won.

The pound gained after Truss took to the lectern outside 10 Downing St on Thursday to announce she was stepping down. After an initial surge, it ended the day around 0.3 per cent higher against the dollar at US$1.125. Gilt (government bond) prices also pushed higher, sending the 10-year yield down from its highest point of the day above 4 per cent to 3.92 per cent.

Both are a sign that investors think Trussonomics is well and truly over. The disruptive right-wing fiscal experiment she and her former chancellor Kwasi Kwarteng unleashed on September 23 had already been gutted to appease markets and the public, and now Truss’s resignation after just 44 days in the job really underlines the point.

But markets are not in party mode. That is because for one thing, investors had seen this coming. Evidently, by the time a politician is being mocked on the internet by a salad ingredient, it is pretty clear their time and agenda are up. In more clever-sounding marketspeak, that means her departure had already been priced in.

Gains in the pound are not to be sniffed at, certainly. At its highest point, it was 1 per cent up on the day. The currency has reversed the effect of the “mini” Budget that sparked all the market chaos nearly four weeks ago. But sterling is not even at its highest point this week.

The bigger reaction really started when Kwarteng was fired on October 14. It is no coincidence that this was when the lettuce challenge began. Since the lowest point of that day, sterling has gained around 0.8 per cent. The collapse to below US$1.04 on September 26 feels like a long time ago.

Similarly, 10-year gilt yields have dropped from almost 4.4 per cent since the end of the day of Kwarteng’s departure. This is a welcome sign that the most dangerous period of the UK’s runaway markets crisis is over. But it is an alarming sign that while prices have recovered somewhat, they are nowhere close to bouncing back to where they started.

In this whole saga, bonds trump the currency. They, after all, determine ordinary people’s mortgage bills and the government’s borrowing costs.

The fact that yields are still elevated despite Truss’s departure is a warning sign to her successor. Clearly, the new prime minister will have to work hard to regain the market’s trust.

This sits uneasily with people on various ends of the political spectrum who argue markets are an inappropriate counter force to the democratic process.

This all makes a certain amount of sense. It is indeed unfair that unelected bond investors get to call the shots. Similar refrains were heard in Italy and Greece during the eurozone debt crisis. But governments cannot compel investors to buy or hold their debt. They can’t make fund managers pick up the bill. If investors do not like a political agenda, or are fearful of the inflation it could exacerbate, they are within their rights to walk away. The UK has, after all, a relatively small bond market compared to the US or eurozone.

Guillermo Felices, global investment strategist at PGIM Fixed Income, says that despite the humiliations of the past few weeks, the UK remains a market investors cannot afford to ignore. Just a few years ago, gilts were a haven for investors fleeing the euro crisis. But do politicians need to refresh their memory on how to charm investors? “Yes, of course,” says Felices. “That’s one of the key lessons. The market can impose some discipline.” A word to the next prime minister: take note.