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How the markets reacted to the new Tory government

Sterling, bonds and equities surged after the general election - but is this just the calm before the storm?

Markets have rallied in the wake of last week's unexpected election result, responding positively to Britain's new Conservative government. 

The pound enjoyed its best one day raise since 2011, the value of British companies swelled by £50bn and the FTSE-250 reached an all-time high during trading on Friday. Pressure on government bonds evaporated and equity prices surged, particularly in energy, property and banking, sectors that would have borne the brunt of Labour's business policies. 

Although the markets have managed to avoid the turbulence a drawn-out period of coalition haggling is likely to have produced, experts have been quick to point out that the uncertainty is far from over and the markets’ strong early performance could prove hard to maintain. 

"Champagne corks may be popping in the City this lunchtime, but when investors sober up they may remember that Britain faces several serious challenges," warns The Guardian’s economics editor Larry Elliot. Two serious consideration now need to be considered: a looming EU referendum and the rise of the Scottish National Party. 

The news that David Cameron is planning on bringing the date of the referendum forward to 2016 is unlikely to calm investors' nerves. The vote on EU membership is bound to spook markets, but the full economic impact of a British exit from the union would be so large it is "impossible to quantify", says the Financial Times. "The City’s concerns fall into three main areas: uncertainty, access and influence." 

A newly strengthened SNP is also likely to have a significant impact on British politics and markets. The party could force the government to offer further devolution in an effort to keep the union together, or could push for a second vote on Scottish independence, something Nicola Sturgeon has refused to rule out. Both scenarios could cause a repeat of the uncertainty that swept the markets ahead of last year's referendum.

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