The FTSE 100 was down 0.7% at 6,968.74, while the pound was 0.5% firmer against the dollar at 1.1329 as Sunak officially became PM after meeting King Charles at Buckingham Palace.
At the same time, the yield on the 10-year government bond was down five basis points, while the yield on the 30-year bond was six bps lower.
Steve Clayton, fund manager at HL Select, said: "Today the markets will decide whether the relief and euphoria that greeted the announcement that Rishi Sunak’s bid for the premiership would be unopposed was merited or not.
"Yesterday, after the announcement at 2pm bond markets saw yields tumble, in sharp contrast to their moves in reaction to the mini-budget a few short weeks ago. Yields on longer-dated bonds have fallen to around 3.75%, which if sustained ought to offer some hope that mortgage rates may soon start to ease.
"Sterling too has recovered from the shock of the mini-budget and today stands at $1.13, the same level as it was when Kwasi Kwarteng stood up to read his speech in the Commons."
Investors were also digesting the latest survey from the Confederation of British Industry, which showed that inflation expectations for the coming months in the manufacturing sector fell in October to their lowest level in more than a year.
The CBI’s monthly net balance of manufacturers expecting prices to rise in the next three months declined to +46 from +59 in September, hitting the lowest reading since September 2021.
Still, sentiment remained gloomy, with the quarterly business sentiment indicator down to -48 from -21 in July and at its lowest level since April 2020.
CBI lead economist Alpesh Paleja said: "It’s a tough time for manufacturers. Price pressures remain acute, availability of materials is still a big issue - and it is 49 years since manufacturing firms were this worried about being able to find workers with the skills they need. It’s really no surprise that sentiment has deteriorated further.
"Action to address the skills challenge is critical for the sector’s future prospects. Urgent reform to add flexibility to the Apprenticeship Levy would be an important first step for the new Prime Minister, which can rebuild confidence for manufacturers and restore momentum to their investment and growth ambitions."
In equity markets, HSBC tumbled even as its third-quarter profits beat expectations, as investors reacted to shock news that chief financial officer Ewen Stevenson will be stepping down at the end of the year. He will be succeeded Georges Elhedery, co-head of global banking and markets at the bank.
AJ Bell financial analyst Danni Hewson said: "Stevenson had a good track record in his previous job helping to rehabilitate NatWest (formerly Royal Bank of Scotland (LON:NWG)) and shareholders will be disappointed not to have his steady hand at the tiller during the current turmoil.
"Stevenson’s departure may also make HSBC more vulnerable to pressure from its largest shareholder Ping An to break up the bank.
"HSBC’s fortunes are increasingly tied to China and the rest of Asia so Xi Jinping’s power grab, which has created concern in international markets, particularly if it means a continuation of hard-line zero-Covid policies, is not helpful for sentiment towards the bank."
HSBC reported a pre-tax profit of $3.15bn for the three months to 30 September, down from $5.4bn last year, but above the $2.45bn consensus of analyst estimates compiled by the bank.
Elsewhere, Premier Inn owner Whitbread (LON:WTB) was also on the back foot despite saying it swung to an interim profit.
Genuit lost ground after saying it expects profit for the year to be at the lower end of analyst expectations as market turmoil hit trading at the end of the third quarter.
On the upside, retailers rose following a well-received update from e-commerce group THG (LON:THG), with Next, B&M European Value and Asos all up.
Market Movers
FTSE 100 (UKX) 6,968.74 -0.65%
FTSE 250 (MCX) 17,383.09 0.26%
techMARK (TASX) 4,164.32 0.35%
FTSE 100 - Risers
Flutter Entertainment (CDI) (FLTR) 11,065.00p 2.69%
B&M European Value Retail S.A. (DI) (BME) 312.90p 2.32%
Pershing Square (NYSE:SQ) Holdings Ltd NPV (PSH) 2,825.00p 1.99%
Next (NXT) 4,970.00p 1.80%
Sage Group (LON:SGE) 729.60p 1.79%
SEGRO (SGRO) 758.40p 1.77%
Hargreaves Lansdown (LON:HRGV) (HL.) 752.40p 1.57%
Scottish Mortgage Inv Trust (SMT) 745.00p 1.44%
Entain (LON:ENT) 1,212.50p 1.21%
Burberry Group (LON:BRBY) 1,850.00p 1.20%
FTSE 100 - Fallers
HSBC Holdings (LON:HSBA) 440.20p -7.35%
Standard Chartered (LON:STAN) 538.80p -4.06%
Centrica (LON:CNA) 66.90p -2.85%
Rio Tinto (LON:RIO) 4,645.00p -2.21%
Anglo American (LON:AAL) 2,629.50p -2.12%
Barclays (LON:BARC) 146.24p -1.81%
Persimmon (LON:PSN) 1,250.50p -1.77%
Antofagasta (LON:ANTO) 1,105.50p -1.51%
Legal & General Group (LGEN) 229.00p -1.42%
NATWEST GROUP (NWG) 237.10p -1.41%
FTSE 250 - Risers
Jupiter Fund Management (JUP) 101.20p 7.55%
ASOS (LON:ASOS) (ASC) 540.50p 4.44%
Hipgnosis Songs Fund Limited NPV (SONG) 88.00p 4.39%
Ascential (ASCL) 190.90p 3.24%
Vietnam Enterprise Investments (DI) (VEIL) 528.00p 3.13%
Molten Ventures (GROW) 257.80p 2.96%
AJ Bell (AJB) 307.60p 2.95%
HGCapital Trust (HGT) 367.50p 2.94%
Urban Logistics Reit (SHED) 129.00p 2.79%
Dr. Martens (DOCS) 221.20p 2.79%
FTSE 250 - Fallers
Genuit Group (GEN) 256.50p -4.11%
Hochschild Mining (LON:HOCM) (HOC) 54.40p -3.97%
Johnson Matthey (LON:JMAT) 1,894.00p -2.87%
Wizz Air Holdings (LON:WIZZ) 1,370.50p -2.56%
National Express Group (LON:NEX) 158.40p -2.40%
Shaftesbury (SHB) 346.60p -2.15%
Auction Technology Group (ATG) 709.00p -2.07%
Ibstock (IBST) 151.50p -2.07%
Energean (ENOG) 1,325.00p -1.85%
Allianz (ETR:ALVG) Technology Trust (ATT) 222.00p -1.77%
