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- Liz Truss resigned as UK prime minister on Thursday after just 45 days in the role.
- Her tax-cutting proposals and economic U-turns had plunged markets into chaos.
- Yields on government bonds soared, while the pound plummeted towards parity with the dollar.
The markets have spoken – and Liz Truss has resigned.
Truss quit as UK prime minister after just 45 days in the role Thursday, becoming the shortest-serving leader in the country's history.
Her premiership plunged British markets into turmoil, with soaring bond yields fuelling a potential pension fund crisis and the pound plummeting to an all-time low against the US dollar.
These three charts show the market chaos of the past 45 days:
Truss and her finance minister Kwasi Kwarteng rattled markets when they unveiled a mini-budget on September 23.
The government pledged to implement the UK's most aggressive tax cuts in nearly 50 years, scrapping the top rate of income tax and slashing basic rates by 1%.
But Truss' $48 billion tax-cutting plan spooked economists, who warned it would undermine the Bank of England's efforts to tame inflation and force it to hike interest rates even higher.
"Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy," economists at the International Monetary Fund warned.
The pound fell to an all-time low of $1.0350 on September 26 as investors signaled their dissatisfaction with the government's fiscal policies.
The prime minister eventually bowed to market pressure by firing Kwarteng at the end of last week. His replacement Jeremy Hunt reversed nearly all of the government's planned tax cuts.
The pound climbed 0.32% to trade at $1.1254 at last check as news of Truss' resignation filtered through markets.
Truss' economic policies also caused carnage in gilts, or bonds issued by the UK government.
Her tax cut proposals sent yields on 2- and 10-year gilts above 4% – making it significantly more expensive for the government to borrow money.
And when 30-year gilt yields climbed to 5.06% on September 28, the Bank of England announced an emergency two-week bond-buying program to try to stabilize debt markets.
The BoE intervened to prevent a collapse in pension funds that use liability-driven investment (LDI) strategies. These funds were forced to sell off their gilts to avoid margin calls, driving up market instability and spurring yields even higher.
Since the BoE announced its emergency bond purchases, 30-year gilt yields have dropped 110 basis points and fell another 2.9 basis points after Truss resigned Thursday.
Equities also felt the pain of "Trussonomics" – although they've been supported by investors' hopes that central banks may start pivoting away from aggressive interest rate hikes as well as a better-than-expected third-quarter earnings season.
London's FTSE 100 index has fallen 4.97% during the past 45 days, which accounts for over two-thirds of its losses year-to-date.
Political and economic chaos in the UK could also weigh on stocks and other assets in the long term, strategists said.
"First her policies went up in flames, then her brief career as prime minister," IG's chief market analyst Chris Beauchamp said. "The great political gamble of Liz Truss has spectacularly backfired but not before wreaking significant damage to the UK economy."
He added, "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."
source https://markets.businessinsider.com/news/currencies/charts-liz-truss-resignation-uk-markets-gilts-pound-dollar-treasurys-2022-10