European stock markets closed higher as Britain's prime minister Liz Truss' premiership hangs by a thread as new chancellor Jeremy Hunt overhauls the government's fiscal plans.
"New chancellor Jeremy Hunt will be pleased to see the FTSE 100 rising, the pound gaining against the dollar and the euro, and gilt yields falling in response to his new policy salvo," Russ Mould, investment director at AJ Bell said. "Achieving some degree of near-term calm is a good thing, but neither Hunt nor prime minister Truss can rest on their laurels."
"The medium-term challenge of navigating a path between recession and inflation remains and then come the long-term tasks of picking sterling off the floor and managing the nation’s £2.4bn national debt."
Trouble has been brewing following an extraordinary week in British politics as Truss continues to fight to hold on to the top job.
The chaos has seen US president Joe Biden intervene, calling Truss’s economic vision a "mistake", while three Conservative MPs have already broken ranks to call on her to go.
Crispin Blunt, Andrew Bridgen and Jamie Wallis all called on Truss to quit on Sunday, while other senior figures within the Tory party expressed deep unease with her leadership but stopped short of demanding her exit.
Blunt was the first MP to call for her removal, telling Channel 4’s Andrew Neil Show on Sunday: "I think the game is up and it’s now a question as to how the succession is managed."
Hunt, who took over from Kwasi Kwarteng after he was sacked by Truss, delivered parts of the government's medium-term fiscal plan, originally slated for 31 October.
The new UK chancellor scrapped nearly all of the tax cuts contained in last month’s mini-budget in a bid to reassure markets that he has a grip on the public finances.
He announced the government will scrap plans to reduce the basic rate of income tax from 20% to 19% in April next year, while help with energy bills for households will only last until April, and ditched plans for new VAT-free shopping for international tourists.
Neil Wilson, chief market analyst at Markets.com, said: "Whatever it takes was the message from Hunt but it might not be enough — just about everything in the mini-budget was junked. Of note in terms of government borrowing is the end of energy price support in April — no longer the two-year energy guarantee that Truss had built a lot of her support on.
"Hunt has gone further than expected to shore up market confidence, but it’s still a mess – economic policy cannot be made up on the hoof like this and retain any kind of credibility. The weaknesses in the underlying economy remain."
Watch the Chancellor @Jeremy_Hunt’s statement outlining the measures being brought forward from the Medium-Term Fiscal Plan that will support fiscal sustainability.https://t.co/faGd6A9YVp pic.twitter.com/1MWp4Y2ewv
— HM Treasury (@hmtreasury) October 17, 2022
Michael Hewson, chief market analyst at CMC Markets, said: "Not only will any new budget need to pass the smell test for everyone, global institutions as well as financial markets, but the wider question is whether the current government can even survive the next few days.
"A lot of that will depend on the internal wranglings within the Conservative party, which is a luxury the country can ill-afford.
"The party needs to get its act together, stop talking to itself and start talking to the country, and doing what it was elected to do, govern the country with something resembling competence."
Sterling rose 2.1% against the dollar to $1.14, and the yields on the UK's 30-year debt and the 10-year gilts fell almost 8%. Yields fall when prices rise.
Across the pond, Wall Street indices tracked European shares higher at the open after dropping closing volatile week marked by big swings in both directions lower.
Stocks fell at the start of the week, then tumbling sharply again on Thursday data showed prices rose above forecasts in September — a major setback for traders who had hoped for an inflation report that might give the Federal Reserve space to slow down its hawkish pace of interest rate rises.
"The current market projection is that not only is a further 0.75% hike nailed on for November, but December will also see a similar rise as the Fed attempts to "front load" rates," said Richard Hunter, head of markets at Interactive Investor.
"Such a strategy would leave some gas in the tank to initiate rate reductions in the event of a recession, but for the moment investors are reeling from the reversal of what has been a sustained period of easy monetary policy."
Asian stocks finished mixed overnight with the Nikkei (^N225) down 1.6% in Japan, while the Hang Seng (^HSI) edged 0.5% higher in Hong Kong and the Shanghai Composite (000001.SS) gained 0.4% in mainland China.