Uncertainties ahead as economic and political risks escalate:The Slow Burn,What was behind the Brexit decision and what lies ahead?

Brexit vote had huge short term impact, wiping off USD 3 tn in two tradingdays following the vote, roughly equal to the entire 2015 nominal GDP of the UK; shortterm volatility presents significant market opportunities

    Reasons for Brexit “leave” vote may have been focused on immigration andsovereignty, but many economic reasons including widening inequality are alsobehind the Brexit decision and the rise of populism globally

    UK is likely to enter a lengthy period of uncertainty: in the UK significantdebate on leadership succession and the possibility of a second referendum shouldoccur prior to invoking Article 50, and potential independence referendums could turnthe United Kingdom into the Divided Kingdoms

    Long term impact on Europe may be even more serious than in UK, with risk ofpolitical contagion; it remains to be seen if Brexit result will spur Euroscepticmovement or act as a wakeup call for pro-Europe voters, European referendums andelections starting in 4Q16 take on increased significance

    Real economic impact negative but scale is difficult to gauge: currencies maytrade around a post-Brexit new equilibrium, monetary policy should turn more dovishas a whole but divergence between the US and the rest of the world should widen, realeconomic impact negative but manageable in short term (0.3-0.5 ppt of UK GDP in2016-17) while long term ramifications will be unclear before Brexit negotiationsprovide clarity on post-exit terms

    Overview:

    Last week’s Brexit referendum outcome led to enormous market volatility in the short term,but should also create some significant long term ramifications for the economic and politicallandscape. Medium-long term political risks have risen significantly, with European politicalcontagion, the US election, and the global rise of populism the most considerable risks ahead.

    Economic risks are solidly balanced toward the downside, with a manageable short termdrag likely to be seen immediately, and longer term complications may also be ahead.

    With that said, the doomsday predictions following the outcome of the vote likely painted toogrim of a picture for the UK and the rest of the world. With significant volatility in the daysfollowing the referendum and a massive selloff and flight to safe haven assets, investorshave a rare window of opportunity to pick up undervalued assets or take profit on FXpositions or safe haven investments. After several days of volatility, we see some short termstabilization of the FX markets but high levels of uncertainty ahead should provide numerouscatalysts. We see further depreciation risks for the GBP and EUR, while we expect the USDto strengthen gradually in the time ahead.

    With the Brexit vote, some may say that everything has changed, and others may say thatnothing has changed. It may be the beginning of the end of a united Europe and globalizationas a whole, or it may just be a speedbump in a long journey. While markets reacted instantlyin an initial spark, the economic and political impact on Europe should be more of a slowburn rather than a blazing inferno; the effects of the outcome will not be fully felt for years tocome. Slowly but surely, the global political landscape seems to be showing signs of shifting.

    An era of greater uncertainty may be ahead: with the Brexit referendum surprise, theupcoming elections in the US and Europe just got a lot more interesting to watch.