Despite real economic challenges, the risk of a significant recession in Europe remains low -- barring monetary, fiscal or banking policy mistakes in the wake of the EU elections.
UK Political Turmoil (Again)
What will happen now is a new leader will try and find a consensus in the UK parliament for a solution. Whether the EU agrees to that solution is another matter. If they cannot, or the EU rejects it, then it will have to return to the electorate, either in the form of a general election, or less likely, another referendum. This raises the prospect of a ‘Hard Deal’ Brexit, which the market is conscious of. It also raises the prospect of a win for the Labour Party, which would not be perceived as business or debt friendly and thus it would not be viewed as a market-friendly government. As such, you would expect the currency to weaken and UK assets to price in this risk. Oddly they are not. As we are in a period of political chaos and uncertainty, the risk to the downside is clear and only when the new leader of the Conservative Party is named, will that begin to be priced in.
What Happens Next?
Caution and Opportunity
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