Liz Truss resignation: what happens next?

Liz Truss has resigned. The future of both the Conservative party and the UK government remains unclear. In the coming days, we’ll be finding out more information on the leadership contest and whether a general election could follow. 

What happens now Liz Truss has resigned?

Now that Liz Truss has resigned, the race for the next leader of the Conservative party starts. The law states that there must be always a Prime Minister, so Truss has said she will remain in the position until her successor is named.

The contest to replace her is expected to be completed by the end of this week but we could get the answer as soon as Monday.

 Any candidate will need at least 100 nominations from fellow Tory MPs to get on the ballot, so that means there will be no more than three contestants given there are 357 Tory MPs. Currently, only Rishi Sunak (who already has over 100 nominations) and Penny Mordaunt have put their names forward - Mordaunt only has until 2pm today to reach the 100 backer threshold. Boris Johnson has confirmed that he will not be standing.  

Will there be a UK general election?

Although Liz Truss has resigned, there will not be an automatic general election to replace her. Instead, the Conservative Party will select its next leader through an internal leadership race. 

Although a new party leader is under no obligation to call for an early election, Boris Johnson did call a snap election within a year to gain a parliamentary majority – which he did. Would a new Tory leader do the same? It’s unlikely, given that polls currently favour the Labour party to win the next general election, planned to take place on Thursday 2 May 2024.

In which case, there are only two ways that an early election would take place:

1. A motion of no confidence is passed by a simple majority in the Government, and 14 days pass without a new Government receiving a confidence motion
2. A motion for a general election is agreed by two-thirds of the Commons

Due to the harsh criticisms the Conservative party face over its handling of the cost-of-living crisis, there are calls for a general election to provide a new government with a clear mandate.

Sir Kier Starmer has said:

"The British public deserve a proper say on the country's future. They must have the chance to compare the Tories’ chaos with Labour’s plans to sort out their mess, grow the economy for working people and rebuild the country for a fairer, greener future. We must have a chance at a fresh start. We need a general election - now."

While Lib Dem leader Ed Davies has said:

"We do not need another Conservative prime minister lurching from crisis to crisis, we need a general election, we need the Conservatives out of power and we need real change…It is time for Conservative MPs to do their patriotic duty, put the country first and give the people a say."

However, it's more likely still that a new leader will wait to see if polls bounce back once they've had a chance to restore some economic stability.  

How would an early election impact markets?

As a general rule, investors prefer elections that have a predictable outcome, regardless of the party. As of 20/10/2022, the Labour Party is leading the polls with 52%, followed by the Conservatives at 23%, and the Lib Dems at 10%.¹

UK stock market

UK stocks and indices usually see short-term volatility around elections as domestic companies and London-listed international firms alike prepare for the change in policy.

Stock markets do also tend to prefer a Conservative government that will be more business focused. The Stock Market Almanac found that the FTSE All-Share only rose in three years when Labour won, compared to eight out of nine years the Conservatives won – delivering average returns of -5.8% and 10.8% respectively.

Currently, the Labour Party is leading the polls, largely due to the public’s disapproval of the current government.

But once an election is over, there’s no evidence that the stock market performs differently under a Conservative government as it does a Labour government – as there are so many other factors at play other than the internal politics of Downing Street.

For the most part, the stock market will move in the same direction after an election as it was beforehand and in the year to date, the FTSE All-Share has fallen by 8.57% due to a culmination of recession fears and the Ukraine crisis.

GBP outlook

As investors and traders seek to understand how new policies could impact the UK economy, there is likely to be movement in the pound – this is true whether there’s an election or just a change in leadership. Previous elections have seen price swings of up to 10 percentage points.

In the last election, the pound surged when exit polls predicted a huge Tory majority. This was largely as the result would end the political uncertainty surrounding the UK economy at the time – namely Brexit.

It’s likely that any future election’s impact on the pound would be similar, as the UK economy is in a more precarious position than it was three years ago.

GBP currency pairs are likely to see volatility, the most traded being GBP/USD and EUR/GBP.

Trading general elections

For traders, general elections – and political turmoil in general – can inject excitement into the markets. The volatility creates opportunities for going long and short on UK companies, GBP currency pairs and government bonds.

You can take a position on thousands of markets with City Index.

1. Open a City Index account, or log in if you’re already a customer
2. Search for the asset you want to trade in our award-winning platform
3. Choose your position and size, and your stop and limit levels
4. Place the trade

Or you can try trading UK assets risk free by signing up for our demo trading account.

How to prepare for UK volatility

Whether a UK general election is called or not, the UK can expect to see volatility over the coming months as the political instability adds to an already tense economic environment.

To best prepare yourself, you should:

1. Keep up to date with the latest analysis – use our news and analysis from in-house experts and in-platform Reuters feed
2. Set up market alerts – get notifications of key events and receive personalised price alerts via SMS, email or in-platform messages
3. Manage your risk – ensure stops and limits are added to your positions to close your trades automatically at your predetermined levels of profit or loss

¹https://www.politico.eu/europe-poll-of-polls/united-kingdom/