While the election of Liz Truss as the new leader of the Conservative Party was one of the worst-kept secrets during weeks of Tory hustings, the former Foreign Secretary didn’t win by the landslide that was expected.
In fact, she collected 81,326 Tory membership votes and a 57.4% share of the total ballots cast, with this percentage considerably lower than those boasted by Boris Johnson and Theresa May during similar elections.
This highlights a significant split in the Tory Party, with many members unsure about Truss’s economic credentials and policies. But how have the markets reacted to Truss’s ascension, and could the economy be heading for a fall under her leadership?
How Did the Markets React to Truss Being Elected?
It’s fair to say that the financial markets did not react well to the news of Truss’s election, with the FTSE100 and similar indexes maintaining their losses amid much broader risk-off sentiment.
The market leading FTSE fell by 0.7% immediately after the announcement, as stocks struggled to rebound from a strained macroeconomic climate that’s currently characterised by rampant inflation and steadily rising interest rates.
These conditions are particularly challenging for businesses, who are faced with a scenario where both general prices and the cost of borrowing continue to rise at a disproportionate rate to earnings.
Pound sterling has also continued to slump following Truss’s election, although the GBP is also being undermined by a rate of inflation that remains above 9%. Of course, forex traders at least have the advantage of hedging against the pound and utilising stop losses to minimise the impact of volatility, but this is hardly good news for investors with a more risk-averse outlook.
It’s forecast that the popular GBP/USD pair could dip below 1.13 in the near-term, while the pound has also recorded marked losses against similar major currencies such as the Euro.
Why are the Markets Suspicious of Truss?
There are two main issues surrounding the election of Truss. Firstly, she’s considered by many to be more of an ideologue than a pragmatist in some respects, with some of her proposed policies potentially putting her on a collision course with the Bank of England (BoE) and the European Union.
For example, she’s pledging to remove all EU-based laws from the UK’s statute books by the end of 2023, including critical workers’ rights and minimum wage legislation.
If this was to afford the UK an unfair competitive advantage in the marketplace, it would breach the UK’s withdrawal agreement with the EU and potentially trigger a costly trade war and the introduction of tariffs.
However, the policy itself has come from an entrenched and ideological anti-EU position, suggesting that Truss is willing to risk economic stability and contraction in order to showcase her hardline approach to EU relations (despite her talk of wanting to inspire continued economic growth).
The second issue revolves around the vague and potentially outdated content of Truss’s economic policies, many of which appear to have been based on the notion of ‘trickle-down’ economics.
This broadly suggests that slashing corporation and income tax rates helps to create growth and inspire job creation, ensuring that the advantages are shared and passed directly to the poorest households in the UK.
However, it should be noted that Truss has created no mechanisms to ensure a fairer distribution of wealth and the cash savings generated by her tax cuts. This is because she’s a proponent of free market economics, meaning that corporate tax savings are just as likely to be passed to shareholders than customers or households.
Certainly, it can be argued that Truss’s vague and non-targeted tax cuts would do little to help the poorest individuals in the UK (many of whom don’t pay any income tax as their earnings are below the £12,570 threshold.
At the same time, extended tax cuts could also prove inflationary and exacerbate the cost-of-living crisis in the short-term, especially in the case of VAT (which she has pledged to slash on a mass scale). Once again, it’s also hard to ensure that VAT savings are shared with customers, especially without any formal mechanisms in place to help achieve this objective.
Another question that remains is how will Truss and her Cabinet afford these tax cuts, especially when they’re considered alongside the new PM’s desire to increase infrastructure spending?
This is definitely causing angst in the financial markets, with Truss initially suggesting that the existing Covid-19 debt mountain could be packed up and sold off, with this also happening to war loans during World War II.
This is a risky move that may not prove effective, especially as she would first need to convince the bond markets to buy the loans.
This type of uncertainty and sustained volatility will continue to weigh heavily on the pound, while stocks may also suffer as customers continue to struggle with minimal disposable income levels and rising bills.
The Last Word
Ultimately, the markets have not reacted well to the election of Liz Truss, with former Chancellor Rishi Sunak seen as a much more competent and capable economic leader.
There’s good reason for this scepticism too; as Truss’ economic policies are incredibly vague, uncosted and not particularly likely to stimulate the type of sustainable growth that she allegedly craves.
Of course, things will become a little clearer this week as Truss outlines more policy details through her hotly-anticipated “mini budget”. Even then, however, Truss has to prove that he has a grasp of the unique challenges facing the UK and the best way to combat and beat inflation.
