UK markets get new govt boost

Gordon Brown resigned as prime minister late on Tuesday,bringing to a close 13 years of Labour rule,and was replaced by Conservative leader David Cameron,whose party won the most seats in last week8217;s inconclusive election.

Cameron will lead Britain8217;s first coalition government since 1945 with Lib Dem party leader Nick Clegg as his deputy and the Conservative8217;s George Osborne as finance minister.

Gilt futures jumped half a point in early trade and outperformed their euro zone counterparts as investors hoped the new administration would take swift action to reduce Britain8217;s record budget deficit.

Sterling had enjoyed a strong performance overnight but relinquished some ground to trade broadly steady against the dollar and euro at 1.4950 and 84.60 pence respectively.

Yesterday8217;s relief rally has petered out but I do expect the new government to take quick action on spending cuts which should keep the ratings agencies on side,said Kenneth Broux,market economist at Lloyds Banking Group.

The coalition is expected to implement Conservative plans to cut six billion pounds of spending this financial year,earlier than Labour or the Lib Dems,had campaigned for.

At 0756,the June gilt future was 26 ticks up at 116.84,off a session high of 117.08 struck shortly after the open,but still outperforming the equivalent Bund by more than 30 ticks.

In the cash market,the yield on ten-year gilts fell 4 basis points to 3.863 percent,narrowing the spread between 10-year gilt and Bund yields 8212; a barometer of investor sentiment 8212; to 91 basis points from around 96 on Tuesday.

The internationally focused FTSE 100 was up 0.4 percent,underperforming greater gains for the pan European FTSEurofirst 300.

But the more domestically exposed FTSE 250 gained 1.2 percent,with analysts saying political developments were supportive.

A Conservative-led government would tend to favour small and medium sized companies because of their domestic orientation as it is likely to be supportive of the pound,said Jim Wood Smith,head of research at Williams de Broe.

DEVIL IN THE DETAIL

Cameron8217;s succession removed some of the uncertainty that drove sterling to a 13-month low against the dollar last week after an inconclusive election gave no party an absolute majority in parliament

Analysts said investors were now waiting for more detail on the new administration8217;s debt cutting plans.

The Conservatives had pledged in their election manifesto to hold an emergency budget within 50 days of entering office.

The dire state of the UK8217;s public finances,with a budget deficit of over 11 percent of GDP,has been a cause of concern for ratings agencies,with investors sensitive to the potential for a downgrade of the UK8217;s sovereign rating which would hamper efforts to pay off the deficit.

If they manage to put through the austerity measures,you can presume the triple-A rating is pretty safe,said Charles Diebel,strategist at Nomura. But that8217;s a slow burn. It8217;s cold hard facts we8217;re waiting for now.

The next focus for investors will be UK unemployment data due at 0830 GMT,and the Bank of England8217;s quarterly Inflation Report at 0930 GMT.