After the earthquake of the referendum, the got more clarity from the political landscape in the UK. With responsibility, Andrea Leadsom stepped down leaving the option for Theresa May to become the next Prime Minister. At least, now, we know who is going to negotiate the terms of the divorce with the EU. However, as nobody expecting such result, nobody is ready to put on the table an agenda, and anyone has an idea about the first topic to discuss it. Indeed, it is just the beginning of a long trip, but at least, the UK has a pilot. However, more volatility can be expected from new developments and likely the Pounds and small and medium caps equities are going to know an uncertain time.

The Brexit shadowed some important events In the European Union. The IMF warns about the critical situation of the Italian banking system, where authority is dealing with about 360 billion euros of troubled loans. According to the IMF, Italian’s economic recovery is subject to risks, with growth projected to reach 1.1 percent this year and 1.3 percent in 2017. In the meantime, the public debt has reached 133 percent of GDP, “a level that limits the fiscal space to respond to shocks”, according to the IMF. Parallelly, the Italian political stability will be challenged in September or October. Prime Minister Matteo Renzi is staking his career on a referendum to overhaul the political system.
In Spain, Mariano Rajoy still did not have a majority to govern the country. A third election becomes more likely day after day. Following the French parliament vote on a new Labour law this month, the IMF criticised the rigidity of the French working market. The unemployment rate is stuck over 10 percent, roughly twice the level of the U.K. and Germany. GDP will expand 1.5 percent both this year and next, a too low level to change the labour landscape in the country. Few months before the next Presidential election, the situation leaves a boulevard to the extreme right party: the Front National.
Finally, the European Union in an unprecedented move ruled that Spain and Portugal violated EU spending limits. That paves the way for negotiations over possible financial penalties, up to 0.2 percent of respective GDP.

In the US, the last payrolls climbed by 287,000 last month, exceeding the highest estimate in a Bloomberg survey. The figures are coming after two disappointing months, and we will need to see more to have confidence that companies are staying the course on hiring in the face of weaker profits. Even with the June figure, advance, job growth over the last three months averaged 147,000, down from almost 200,000 in the first quarter. The unemployment rate remains at 4.7% and the participation rate close to its lowest historical level to 62.7 percent. Wages improved modestly, with average hourly earnings up to 2.7% from 2.6% from one year ago. The US markets sent bonds to record low yields and stocks to record highs at the same time. Flight to quality and high probability of no move from the FED are the biggest drivers of this unsustainable trend.

In Japan, Prime Minister Abe won a majority in a new election. In a television speech, he repeats his pledge for bold economic measures. He announced a new fiscal stimulus package, likely around 20 trillion yen ($192 billion). The weaker yen and the talk of fiscal stimulus are giving Japanese equities a short-term boost, which is likely to be unsustainable without structural reforms.

Fundamental prospect in developed countries decreased significantly this week. Outside Germany, economic and/or political outlook in Europe is darker than ever.
According to the IMF, in the UK, the Brexit would cost to the growth 5.5 percent off the GDP by 2019.
In the US, after six years of expansion, a full employment situation, decreasing profit forecast and few months before a presidential election, the probability of a recession is quite high.
Finally, in Japan, the government continues a politic which did not work, and it will not function without structural reforms.
The government has left the job to the Central Banks, which are going to continue injecting massive liquidity into developed economies. On the short and medium term, equity market will take advantage of this situation with an increase in volatility. This movement is not grounded on fundamental reasons, and it is in nature unsustainable.

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