Former British finance minister Rishi Sunak will be Britain's next prime minister after his rivals quit the race, which analysts said had relieved some of the nervousness around the outlook for the UK economy, boosting domestic markets.

The 42-year old will become the country's third prime minister in less than two months, after his predecessor, Liz Truss, was brought down after just six weeks in office by an economic programme that roiled markets.

Sunak has yet to speak publicly but told Conservative lawmakers his first priority was delivering economic stability, and then he would look to fulfill the party's 2019 election promises,

lawmaker

Iain Duncan Smith said.

The pound bounced back into positive territory against the dollar, having briefly turned negative, while consumer-sensitive stocks pushed the blue-chip FTSE 100 higher on the day.

MARKET REACTION:

STOCKS: FTSE 100 rises 0.9% on the day, supported by consumer sectors and industrials, but is still underperforming the broader European markets, where the STOXX 600 is up 1.9%.

FOREX: Sterling rises 0.2% against the dollar to $1.13155, having ricocheted between the day's high of $1.1402 and the low of $1.1275 in volatile trading.

BOND MARKETS: Ten-year gilt yields are down 26 basis points on the day at 3.79%.

COMMENTS:

JOSH MAHONEY, SENIOR MARKET ANALYST, IG GROUP, LONDON:

"The news of Rishi Sunak's successful bid to become the new Prime Minister has spared markets any additional uncertainty today, with the UK essentially set to be steered through this crisis by two chancellors.

Gilt markets have certainly responded positively, with falling yields bringing hope that we will see borrowing costs continue to ease after a turbulent Truss tenure. Nonetheless, with the pro-growth policies a thing of the past, the pound finds itself under pressure given the warning signs provided by the collapsing PMI surveys released this morning.

The hope for many is that tighter central bank and government policies will swiftly drive down inflation without hurting the economy too much. However, traders will remain concerned that the economic fallout is more damaging than expected, and inflation keeps rates higher for longer."

PAUL JOHNSON, DIRECTOR, INSTITUTE FOR FISCAL STUDIES, SPEAKING TO BBC TELEVISION:

"One of the problems I think that the new prime minister and his new chancellor face is that, given all the uncertainty that's been created over the last few weeks, they may have to make more difficult decisions than they otherwise would have had to. Because the markets are still somewhat spooked and they are going to be wanting to see some clear and decisive action, perhaps more than they would have required (if) we had not had all this upset over the last few weeks."

JASON PALTROWITZ, DIRECTOR AND EXECUTIVE VICE PRESIDENT , CORPORATE SERVICES, OTC MARKETS GROUP, NEW YORK:

"From a US perspective, this will be viewed as a positive step to creating stability and clarity for the near future. US investors will want to see Sunak and, assuming he stays, Hunt, provide a well thought out and clear strategy to tackle the ongoing economic issues impacting the UK."

RUTH GREGORY, SENIOR UK ECONOMIST, CAPITAL ECONOMICS, LONDON:

"The fall in gilt yields on the news today that Rishi Sunak will become the UK’s next Prime Minister has reduced the chances of a significant fiscal consolidation. Even so, the new PM will still have to work hard to restore stability in the eyes of the financial markets.

This means that the risks to our forecast that the economy will enter a recession involving a peak-to-trough fall in GDP of around 2% are still skewed to the downside."

MICHAEL BROWN, HEAD OF MARKET INTELLIGENCE, CAXTON, 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. 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."

DANNI HEWSON, FINANCIAL ANALYST AT AJ BELL, LONDON:

"The markets are confident that they know the kind of Prime Minister Rishi Sunak is likely going to be because they know the kind of chancellor that he was and clearly he understood how damaging those unfunded tax cuts were likely to be.

The yields have come down, which just demonstrates that the markets do feel more comfortable and they feel that once again the UK is getting back to the kind of economy that they would expect from an established economy rather than an emerging economy.

With the pound, just because we have a new Prime Minister in place, all of the issues don't just go away and we still have remarkable strength being enjoyed by the dollar."

GILES COGHLAN, ANALYST, HYCM, LONDON:

“With Rishi Sunak named as the UK’s third prime minister in three months, the question now is whether today's events will mark the beginning of a turn higher for the GBP as confidence returns in the Government’s fiscal plans.

However Sunak’s premiership unfolds, there are likely to be more difficult times ahead for the UK economy as it grapples its way out of a worsening downturn and even the prospect of a general election – upheaval which could derail the markets further.

That said, there is one aspect of help for the GBP that is often overlooked. On the other side of the Atlantic, a slowdown in Federal Reserve policy would likely help lift the GBP as much, if even not more, than UK fiscal policy,"

-Reuters