John Major's victory gave sterling and other markets an immediate boost, but the City was divided over whether the good reception would last after international investors digested the news.
In late trading, sterling rose half a cent to $1.6020 and 0.4 pfennigs to DM2.2082, FT-SE futures were up 17 points and gilts rallied half a point.
Bill Martin, chief economist at UBS, said: "The net effect of the leadership contest has been to raise the tax-cutting stakes. The Chancellor will probably feel obliged to deliver tax cuts greater than the Redwood floor of pounds 5bn in November. It would be wrong to assume all political risk has been removed."
Kevin Darlington, of Hoare Govett said: "This does not end the risk that the Government will be tempted to play fast and loose with the economy to win the general election." According to Neil MacKinnon of Citibank, ''we will have to wait another day for the reaction of international investors. The City's initial view often tends to be reversed in the cold light of day."
Keith Edmonds, senior analyst at IBJ International, nevertheless expected a rally in the pound now the air has been cleared.
Equity specialists were also encouraged. Edmond Warner of Kleinwort Benson Securities predicted a 1 per cent rise in the FT-SE 100 index today on the grounds that "if John Major got anything like a credible majority - and that means anything which begins with a two - the Cabinet heavyweights would come out and support him." Such backing was already becoming evident, he suggested.
Allison Southey, an equity strategist at Nomura, said although the short- term response might well be positive, the long term could be more uncertain. "We haven't learnt any more about economic policy. There might be more horse- trading to keep all the factions happy."
Ian Stewart, UK economist at brokers Smith New Court, said the news was good for currencies, equities and bonds. "Now that this uncertainty has been ended, the market will revert to the upward trend seen in the last few weeks."
Neil Woodford, a senior UK fund manager at Perpetual, said the votes cast in favour of John Major would be enough to "calm nerves a bit".
"But a lot depends on whether victory can be used for greater political stability in the longer term and whether John Major can achieve some sort of consensus in the party on Europe," said Mr Woodford.
A strategist for another investment institution said market uncertainty would remain for some time, but he agreed the size of Mr Major's victory might calm nerves a little in the short term. He said his institution was not worried about the possibility of a Labour government but that "the present Government may do something imprudent or take a risk".
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