The British pound rose above $1.30 and stocks struck 11-month highs on Monday as Theresa May looked set to be confirmed as prime minister after her remaining rival withdrew from the contest. While Andrea Leadsom's exit removes the need for a drawn-out leadership contest, investors remain uncertain about May's approach to negotiating Britain's exit from the European Union and whether she will call a general election to cement her authority.
Sterling rose to the day's high of $1.3020, having traded at $1.2865 before reports that Leadsom might withdraw earlier on Monday. It was last trading at $1.3010, 0.45 percent higher on the day, boosted by Prime Minister David Cameron's comments that he will resign on Wednesday, much earlier than planned, for May to take-over the same day. The blue chip FTSE 100 index ended over 1 percent at its highest level since August 2014, led by housebuilders, which had fallen sharply on expectations of slower growth. The more domestically-focused mid-cap FTSE 250 finished over 3 percent. British 10-year gilt yields rose marginally off a record low, pulling other euro zone bond yields a touch higher.
"Things are a bit clearer - we know who the next prime minister is going to be," Michael Hewson, chief market analyst at CMC Markets. "We will get nonsense about a general election but that's the last thing the country needs after the uncertainty created by the referendum."
The chairman of the ruling Conservative Party committee running the contest signalled that the process to replace Cameron would be completed much sooner than early September as previously envisaged. Once confirmed as party leader, May will automatically become prime minister.
Yet investors are wary that she could call a general election and take advantage of a split in the opposition Labour party to strengthen her own leadership credentials. Uncertainty over what approach May will take to Brexit negotiations also hangs over markets. While May backed the 'Remain' camp in the June referendum - Leadsom campaigned to leave - she has said she will respect the referendum result.
"There's still massive uncertainty about what's going to happen," said Ian Gunner, manager of the Altana Hard Currency Fund. "There are so many potential things on the table, like: does parliament vote on it? Do we have another referendum? I think those things become a little more plausible with May as prime minister than they would have been under a Brexiteer."
The BoE, which meets on Thursday, expects the economy to suffer a slowdown because of the uncertainty caused by the Brexit vote though there is scant evidence of the impact so far. Markets price in a more than 70 percent chance of the Bank cutting rates this week, from 11 percent just before the result of the June 23 referendum was announced.
The BoE has kept its main interest rate at 0.5 percent for nearly 90 months. "We expect the BoE to cut rates by 25 basis points on Thursday, which should keep sterling offered," said Hans Redeker, head of currency strategy at Morgan Stanley. There are clear signs the economy needs a boost. According to three surveys released on Monday, British consumer spending fell last month, the business outlook darkened by the most in four years and economic activity in London slowed sharply.