Cameron gets cautious welcome from markets

The markets have taken David Cameron's elevation to prime minister in its stride, with the FTSE-100 rising following early losses and a boost to the pound.

The suggestion is that the City feels the Conservative and Liberal Democrat coalition government is singing from the same hymn sheet economically and will make the immediate £6bn in spending cuts promised in the Tory manifesto. It seems the Lib Dems have jettisoned their opposition to cuts, which, during the election campaign, they said should be delayed until economic recovery is stronger.

One policy rumour that might not go down so well with investors is a doubling of capital gains tax from 18 to 40 per cent. If this proves to be true, we can expect a fall in the stock market as people take low-tax profits from their share portfolios while they can.

But news of a Lib-Con coalition is far from the only show in town. More important to the markets are worries of sovereign debt defaults in the eurozone.

Spain today announced deep budget cuts in an attempt to steady market fears that it will go the way of Greece, which recently had to be bailed out by the IMF. Measures announced by Spain's socialist prime minister, Jose Luis Rodriguez Zapatero, include cuts to pensions and civil service salaries.

Eurozone worries – and not the announcement of Prime Minister Cameron – are probably the main reason why the pound has gained on the euro, reaching the dizzying heights of €1.18 today. And it could get better: last month, Goldman Sachs advised investors that the euro could suffer due to "Greece-related risk factors" and recommended selling the euro until it reached €1.20 against the pound.

Despite yesterday’s upwards revision of British GDP growth from 0.2 to 0.5 per cent and a surge in demand for UK government bonds, investors still seem to see the dollar as a safer bet than either the euro or Sterling. The pound rose today to $1.50 – but it is yet to recover its pre-election level of around $1.52. But these are early days and Chancellor George Osborne's emergency Budget – due within 50 days – should prove decisive. ·