What are some of the main issues for UK assets that we should take from the events of the last few days?
First, the behaviour of markets since the Referendum has followed a time trodden path of price discovery. Markets did not expect the Referendum outcome. The subsequent sell off reflected this and also highlighted that markets are short-term and do not like uncertainty. The discovery is that prices can often overshoot before value is evident and buyers emerge. This has been seen this week, but it would be premature not to expect further volatility, particularly against a backdrop of political and policy uncertainty.
In recent days, as markets have started to find their level, there seems to have been a more considered approach to what lies ahead with Brexit. Also - despite the volatility seen - markets have been well behaved. For those who had misplaced fears about how markets would cope, this in itself has been reassuring. As the Governor made clear the day after the Referendum, the UK financial and banking system is liquid and well capitalised. Thus it has been able to cope.
In fact, the Bank of England had provided the expected stabilising influence. And it was the comments of the Governor yesterday that were also important - in two ways. First the clear message was that monetary policy would do whatever was needed to ensure financial stability and would do what was appropriate for the economy. As we thought, this is likely to mean lower interest rates - not the hike some had thought would follow a weaker pound. In fact, the message remains: rates will stay low for some time.
The second key takeaway from the Governor yesterday was that - despite this - there is only so much that monetary policy can do. This mirrors one of the main messages from the recent G7 meeting in Japan. Then the leaders of the world's major Western economies made clear that fiscal and other policy measures would be needed in addition to monetary policy. Other measures usually include things such as supply side reform and can include cutting regulations; but such measures can also be extended to many other areas.
It also implies that monetary policy needs to stay accommodative here in the UK and across much of the globe, but it may be nearing the end of its limits.
This has important implications for global policy, suggesting more will have to be done to boost global growth using areas often seen as off limits from a political perspective.
Japan, with an election imminent, has already signalled a policy boost. Expect more of this elsewhere - after the US election and also ahead of next year's French and German elections.
It also will impact UK policy. The Bank of England will likely cut rates to zero. Then they will stay there. Gilt yields will remain low. There will have to be a change of tack elsewhere. The Chancellor has backtracked this week on his threatened "punishment Budget". Instead the mood may soon be for fiscal policy to do more. That would likely mean speeding up cuts in corporation tax planned for next year and seeking ways to allow more infrastructure spending. Hands are tied until the new Prime Minister is in place. That could be anytime from now until early September. Until then, markets will keep a particular focus on two areas.
One is sterling. Its fall was welcome. Perhaps it is better if the decline is gradual as opposed to dramatic. The large current account deficit announced this week suggests that sterling not only needs to weaken further to help exports but could still be vulnerable to a change in investor mood towards UK assets. The current account deficit was £ 32.6 billion in the first three months of this year, slightly lower than the previous three months, but still a large number and measuring 6.9% of UK GDP.
The other focus is naturally our future relationship with the EU. I will explain these options in detail on another note. Suffice to say, it may take time for the UK to decide whether to trigger Article 50, which it should, and if so what it wishes to achieve from the negotiations.
Speaking at this week's Times CEO annual conference it was interesting to note the different views among business leaders as to the overall economic impact. It is the uncertainty that concerns many of them most, but there is still a need from the business perspective to continue as before. Trouble is, the UK economy was already slowing ahead of the Referendum, and for reasons probably not linked to the vote. Manufacturing and construction both fell in the first quarter, while services rose, leading to a growth rate of only 0.4%, much slower than the 0.7% in the final three months of last year. Growth is likely to have been soft too in Q2.
There are still many reasons to be positive about what lies ahead, but there may be further market volatility until the political and policy environment becomes clearer.