The global political and economic landscapes have been thrown into a new dimension since the UK's vote to leave the EU. Investor nerves are frayed, central banks are back at their battle stations and currency markets are volatile.

With a fascinating six months ahead, Jeremy Cook, Chief Economist at World First, points out what we should be looking out for.

The aftermath of Brexit

David Cameron told the world that the vote to leave the European Union would ‘set a bomb off' under the British economy. We are unable to tell just how explosive the leave vote has been until August, when data from the UK economy taken in a post Brexit landscape are released. We are of the view that it will be a drastic curtailment of investment and infrastructure spending that will have the largest impact on growth in the short term, with a pickup in unemployment in EU facing industries such as financial services also weighing. A dip in employment will naturally lead to a drop off in consumer spending as well but it will take a few months for the true cost of Brexit to be known.

What will Central Banks do?

Mark Carney has already warned that material damage has been done to the UK economy by the vote to leave and we expect to see the Bank of England cut interest rates to 0% and increase their asset purchases as part of the quantitative easing program at their August meeting. We do not believe that interest rates will go negative in the UK.

The reaction picture is more interesting outside of the UK. We think that interest rates rises in the US have been delayed by a minimum of 6 months, and more likely by 9-12 months as a result of the vote given the Fed's recalcitrance to a strong USD. While GBPUSD is at multi-year lows, USDCNY is at multi-year highs as investors flood to safe haven assets. Likewise, we are likely to see the European Central Bank commit to more asset purchases in a bid to weaken the euro in the aftermath of its run higher versus the pound.

The China question

A myopic market view on Brexit and the European political arena has seen focus lost on the world's second largest economy. As we came into the year we were nervous about Chinese output amid a strengthening yuan and a nervous global economy; Chinese exports still needed to stay cheap so that the transitioning of the economy from manufacturing to services could occur on foundations of solid external demand. That has not happened and news from the Chinese economy has not picked up noticeably since the beginning of the year.

We expect further news from the Chinese corporate sector in the coming month as to the levels of credit and whether further bubble-like conditions are being seen as this will weigh on the likely policy response from the People's Bank of China

Clinton vs Trump

2016 has been a strange year for politics, nowhere more so than in the United States. Either Hilary Clinton or Donald Trump will win the US Presidential Election this November in one of the most bitter and bruising election cycles ever. Much like in the EU referendum, the consensus forecast of the election is overwhelmingly one-sided; and we know how that ended up.

It is very difficult to foresee a Trump win given his casual relationship with consistent and cogent economic policy. The market effects would be one of wholescale confusion and would likely lead the Federal Reserve into another battle with an overly strong US dollar, bid higher by investors looking for a safe haven. His hostility towards Mexico and its people would be largely reflected in a sell-off in Mexican assets, chiefly the peso, while fears of a trade war with China may cause the People's Bank of China to intervene in its currency.

European political positioning

Although not taking place until next year, we will start seeing the early positioning for both the French and German elections in the coming months. We expect that the Brexit argument and vote has emboldened nationalist/populist/anti-EU parties in both countries. Marine Le Pen's Front National will go into the vote as favourites while the German Alternatif fur Deutschland party will be looking to make strong gains as the country deals with the migrant crisis.

We also expect to see calls for additional referenda on European Union membership in the Netherlands, France and Sweden grow louder.

Commodity crunch

Oil has had a good 2016, recovering from its lows to add 80% through into summer. Gold has moved higher on risk aversion from the political maelstrom but industrial metals remain under pressure. This tells us nothing good about the global economy; the world does not need higher oil prices at the moment from a demand point of view. If commodities continue to run higher on fears of a further slowdown in global economic output, that outcome could become self-fulfilling.

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