Brexit: Many known unknowns - BBH

Research Team at BBH, notes that the UK has not officially triggered Article 50 of the Lisbon Treaty, but its influence has already begun to wane. 

Key Quotes

“It has not formally been told that it will not be allowed to assume the rotating EU presidency in 2017, as scheduled. The UK has long been ambivalent about an EU military force, preferring to work through NATO. The divorce proceedings have not even begun, and Europe is moving forward with a new defense and securities initiative.  

The effort stops shy of an EU army or headquarters, two issues that the UK opposed, but it does entail greater coordination of more shared military resources and R&D.  It also shifts the recognition of Russia from a strategic partner to a strategic challenge.  The new proposals by the EU's foreign policy chief Mogherini appear to enjoy the backing of Merkel and Hollande.

The economic consequences of Brexit have not been felt yet in the UK or elsewhere.  The policy response has yet to be seen.  Some policy responses may be known by their absence, as in a Fed rate hike, which the market apparently has given up on for this year and next.  Contrary to what it may seem like, the US dollar did not appreciate markedly on a trade-weighted basis, despite seemingly large currency swings.  

There are many delicate political balances, especially but not limited to Europe, which will have to find a new equilibrium.  The UK is not only leaving a hole in EU finances but also in leadership.  French and German elections next year take on added significance.  A banking and/or political crisis in Italy over the next few months (which is of course largely independent of the UK's decision) needs to be avoided.  

There are many known unknowns.  That is hard enough for investors, but there are seemingly countless unknown unknowns as well.  The path ahead was never envisioned to be easy, but the Brexit decision adds a new dimension of difficulty.”