Post Brexit: Political risks to remain a major challenge - TDS

Research Team at TDS, suggests that while the outcome of the UK referendum continues to echo across the financial markets, currencies have seen some of the most violent adjustment across asset classes so far as investors try to calibrate the risks and opportunities in this new landscape.

Key Quotes

“The outcome of the Brexit process remains highly uncertain. The uncertainty currently unfolding in the UK fits within a broader context of rising political risks in several advanced economies.

For now, we expect the Brexit fallout to stay relatively contained regarding its impact on the global economy. There are certainly risks of escalation, but these are not yet our core scenario. We expect the aftermath of this event to remain a slow-burn story, one that plays out over weeks and months rather than days. Within this, however, it is exceptionally difficult to gauge how markets may react. FX markets, in particular, may not be as well confined as the combination of rapid fluctuations in sentiment and capital flows can result in noteworthy moves in exchange rates.

These risks are likely to build over the next several months. The Eurozone has several key political events scheduled in coming months, culminating with the French and German elections next year. With the US election also on the more immediate horizon, political risks may prove to be the single most important defining feature of FX markets for the foreseeable future. This may make life difficult for investors. In our experience, these markets often struggle when the key drivers transcend the traditional emphasis on economic, financial, and policy analysis and stray into the realm of politics. Politics (and politicians) tends to operate under a different set of rules and assumptions. Political calculations of risks, rewards, costs and benefits can differ dramatically from what might be expected if maximizing one’s return on investment was the goal.”