In interviews on Thursday, many investors predicted that the next prime minister will restore calm and make policy decisions that bring stability back to markets. 

The pound strengthened to above $1.13, and the yield on UK 10-year gilts was near levels before the mini-budget was announced last month. The FTSE 250 Index rallied as much as 1.2%. 

“Markets are calling the shots right now,” said Geoffrey Yu, senior FX strategist at Bank of New York Mellon. “That’s the bottom line.”

Some traders said markets will be volatile until a replacement is named, and any new leader will struggle to fix the UK’s weak economy and double-digit inflation. 

“As long as there is a lack of clarity on Truss’s successor, there will remain a risk premium in gilt markets, which is in our view still around 20 to 30 basis points,” said Joachim Klement, head of strategy, accounting and sustainability at Liberum Capital. 

Truss said that the UK Tory leadership vote would be completed in a week, although Chancellor of the Exchequer Jeremy Hunt won’t stand to be Conservative Party leader, according to a spokesman. 

Candidates to replace her are likely to include former Chancellor of the Exchequer Rishi Sunak. Ex-Prime Minister Boris Johnson is expected to stand in the leadership contest, The Times reported, citing unidentified people. Other contenders then are also likely to be in the fray, including Penny Mordaunt, Grant Shapps and Kemi Badenoch.

Here’s what other investors had to say: 

Mark Dowding, chief investment officer at BlueBay Asset Management:

“There is a sense of relief that it is all over for Truss. But there’s still uncertainty here. Can the Tories coalesce around a candidate or will there be further division. Will we see early elections? More questions than answers in this moment.”

Robert Alster, chief investment officer at Close Brothers Asset Management:

“Markets are looking for a more balanced budget and more political stability for the UK, and sterling is rising in the hope that the new prime minister will provide both.”

Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence:

“The Trussonomics premium should unwind from markets and lessons will be learned from the scene of the crash. Damage limitation is now key to allow the market to have a sustained period of stability.” 

Rishi Mishra, an analyst at Futures First: 

“It’s positive for both the pound and gilts in the long run because this episode will remind every candidate in the future to not undermine the credibility of the government by making outlandish spending plans.”

Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH:  

“A serious solution must be found rather quickly to calm markets as political disagreement is poison for confidence in the market.”

“In our view, the market’s preferred replacement would be Rishi Sunak, who is a known quantity and has managed the country’s finances well during the Covid pandemic.”

Alessandro Barison, a portfolio manager at HI Numen Credit Fund:

“Truss leaving does not change the impact of the energy crisis and hyperinflation in UK.” 

“A more credible government might decrease the UK risk perception, but doesn’t change the energy picture. After an initial rally in gilts, we wonder who is the marginal international buyer of UK assets to finance government and trade deficit. A lower fiscal deficit than under Truss means lower growth. We are bearish on gilts, UK credit and UK banks.”

Esty Dwek, chief investment officer at Flowbank SA:

“It does feel like we have seen the worst of it right now, at least in terms of fiscal risks, given the U-turns we’ve seen in recent weeks, but uncertainty is not going to end as the possibility of a general election will continue to loom over markets for some time. There might be some initial relief in assets as Truss had lost her power anyway, but the direction of the country remains up in the air.” 

Cesar Perez Ruiz, chief investment officer of Pictet Wealth Management:

“It will depend of who comes next and what is the fiscal agenda, although after the Trusssonomics fiasco, the bond vigilantes are back and a return to more fiscal discipline is likely which should restore confidence in UK assets at the margin. Having said that we need to see what happens next and the UK still faces structural challenges (big twin deficit), difficult to solve without a pain process.”

Peter Chatwell, head of global macro strategies trading at Mizuho International Plc:

“The calamitous government has come to an end, which means the risk of a sterling currency crisis is much smaller. We still have a very unstable government, but at least the chance of another attempt at abandoning fiscal orthodoxy is close to zero.”

“What the market can do here is price out tail risks, but not get too excited about a fundamental recovery. The UK is heading into (if not in already) a very deep recession but one where imported inflation will remain very problematic. Only once UK real rates are comfortably above US real rates will the economy be able to stabilize and attract material foreign investment.”

Charles-Henry Monchau, chief investment officer at Banque Syz:

“Liz Truss as a PM was an unsustainable position. The new PM has a lot to do to restore credibility with markets. In a few weeks time, we have moved from ultra loose fiscal policy to tight ones. High political and macro volatility implies high market volatility. There is now a relief rally from the pound (back to pre mini budget) and gilts but this might be short lived due to political uncertainty. Growth forecasts for next year are at risk. We nevertheless turn more positive on UK equities as risk reward looks attractive.”

–With assistance from James Hirai, Macarena Muñoz, Sagarika Jaisinghani, Allegra Catelli, Chiara Remondini and Lisa Pham.