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Global: The stop-go market (page 2)

• Equity markets appear to have shrugged off the UK’s decision to leave the EU despite warnings from the International Monetary Fund (IMF) on the impact on growth. We still see a drag on activity from the rise in uncertainty as well as an increase in political risks.
• Meanwhile, investors are counting on the increase in liquidity to drive risk assets, despite appearing to lose faith in central bank monetary policy earlier in the year. The rally is characterised by a renewed search for yield, creating a “stop-go” market ever more dependent on liquidity injections.
• Yet, although equity investors might be more focused on income rather than growth, even bond-like stocks require earnings to make pay-outs and dividend cover is at a two decade low in the US. The bigger threat though may come from a successful expansion of fiscal policy which would steepen yield curves and create significant market volatility as investors rotate themes.

Brexit: First impact (page 6)

• The UK appeared to have enjoyed solid growth ahead of the EU referendum, but early evidence suggests that activity has slowed sharply since then. Private business surveys suggest output has fallen to levels not seen since the global financial crisis.
• Monetary and fiscal stimuli are likely to follow as the Bank of England (BoE) is expected to cut interest rates soon. The new Chancellor looks ready to reset fiscal policy and is likely to offer a combination of tax cuts and extra spending. Overall, we continue to place a 40% chance on a UK recession.
• While it is too soon to judge if political contagion will spread to other parts of the EU, there is little evidence of a macroeconomic impact.

Tinderbox Turkey (page 11)

• The failed coup in Turkey will have long lasting and negative effects on the country’s economy and politics, as well as regional geopolitics.