London–Britain’s financial markets welcomed Britain’s new Conservative and Liberal Democrat coalition government on Wednesday but enthusiasm was contained as investors waited for more detail on policy.
Gordon Brown resigned as prime minister late on Tuesday, bringing to a close 13 years of Labour rule, and was replaced by Conservative leader David Cameron, whose party won the most seats in last week’s inconclusive election.
Cameron will lead Britain’s first coalition government since 1945 with Lib Dem party leader Nick Clegg as his deputy and the Conservative’s George Osborne as finance minister.
Gilt futures jumped half a point in early trade and outperformed their euro zone counterparts as investors hoped the new administration would take swift action to reduce Britain’s record budget deficit.
Sterling had enjoyed a strong performance overnight but relinquished some ground to trade broadly steady against the dollar and euro at US$1.4950 and 84.60 pence respectively.
“Yesterday’s relief rally has petered out but I do expect the new government to take quick action on spending cuts which should keep the ratings agencies on side,” said Kenneth Broux, market economist at Lloyds Banking Group.
The coalition is expected to implement Conservative plans to cut six billion pounds of spending this financial year, earlier than Labour or the Lib Dems, had campaigned for.
In the cash market, the yield on ten-year gilts fell 4 basis points to 3.863 percent, narrowing the spread between 10-year gilt and Bund yields — a barometer of investor sentiment — to 91 basis points from around 96 on Tuesday.
The internationally focused FTSE 100 was up 0.4 percent, underperforming greater gains for the pan European FTSEurofirst 300.
But the more domestically exposed FTSE 250 gained 1.2 percent, with analysts saying political developments were supportive.
“A Conservative-led government would tend to favor small and medium sized companies because of their domestic orientation as it is likely to be supportive of the pound,” said Jim Wood Smith, head of research at Williams de Broe.
Cameron’s succession removed some of the uncertainty that drove sterling to a 13-month low against the dollar last week after an inconclusive election gave no party an absolute majority in parliament.
Analysts said investors were now waiting for more detail on the new administration’s debt cutting plans.
The Conservatives had pledged in their election manifesto to hold an emergency budget within 50 days of entering office.
The dire state of the UK’s public finances, with a budget deficit of over 11 percent of GDP, has been a cause of concern for ratings agencies, with investors sensitive to the potential for a downgrade of the UK’s sovereign rating which would hamper efforts to pay off the deficit.
“If they manage to put through the austerity measures, you can presume the triple-A rating is pretty safe,” said Charles Diebel, strategist at Nomura. “But that’s a slow burn. It’s cold hard facts we’re waiting for now.”
