Markets rally as investors welcome Rishi Sunak premiership

FTSE and pound gain value after former chancellor fights off rivals

The financial movements in London followed the decision of Mr Johnson not to seek his party's nomination for prime minister. EPA

Financial markets rallied as it was announced Rishi Sunak would be the UK's the next prime minister, after Boris Johnson and Penny Mordaunt withdrew from the race to lead the Conservative Party.

Investors had largely already expected a Mr Sunak victory before it was officially announced on Monday.

In a brief statement, Mr Sunak said Britain faced a “profound economic challenge” and would work to increase stability and unity.

Mr Sunak, a former chancellor, is regarded as a fiscal conservative and his nomination appears to have been broadly welcomed by investors in the City of London.

"It seems that the announcement was pretty well priced in by this point, especially after sterling’s notable gains at the Asia open last night," said Michael Brown, head of market intelligence at Caxton.

"Having said that, Sunak taking over as PM should restore a significant amount of credibility around UK policy, which is likely to limit downside for sterling assets in the near term."

Shares on the FTSE 100 index of London’s biggest companies initially rose by as much as half a per cent, before falling to nearly 0.8 per cent down by late morning.

In the afternoon the FTSE recovered again, rising by 1.1 per cent, hitting 7,045 points. The pound initially dropped in value against the dollar after the confirmation but about an hour later it spiked.

Rishi Sunak wins battle to become UK prime minister - in pictures

At about 3pm one pound could buy a little more than $1.13, up 0.25 per cent on the day.

Gilt yields fell sharply, thanks to a sense of relief among investors over the outlook for Britain's finances. Benchmark 10-year yields fell 28 basis points to 3.774 per cent, nearing their lowest so far this month.

BlackRock, the world's largest asset manager, in a weekly note said Britain's fiscal credibility had improved, but the damage inflicted by Ms Truss's "mini-budget" in late last month had not been completely reversed.

In the end Mr Sunak was the only remaining candidate for the position, after Penny Mordaunt dropped out and Boris Johnson did not declare his candidacy.