Never in the post-war history of Britain has there been such a massive political impact on global financial markets like what we have seen in recent days, following last week's Brexit vote. But how detrimental is this event in the short and medium term?
London - The third estimate of UK GDP growth in the first quarter is expected to confirm a 0.4% expansion, down from 0.6% measured a quarter before. Commercial surveys published earlier this month pointed to even slower growth in the second quarter. Not much of a boost to growth is expected during the rest of 2016 either, given the political turmoil and uncertainty.
The Bank of England (BoE) is seen watching closely the consequences, with the central bank's Financial Policy Committee (FPC) and Prudential Regulation Authority (PRA) now in the spotlight. Those two regulatory arms are responsible for the health of the UK financial system, making sure that British high-street banks have enough buffers to withstand shocks. So far, equity markets show the UK banking sector stabilizing, with shares of major high-street lenders edging up from last week's plunge.
The BoE's Monetary Policy Committee (MPC) is expected to stand on the sidelines for now, although some action may be expected if sterling continues its downward path, if its weakness becomes more persistent, and if the upward pressure on inflation becomes serious. At the same time, the trade off between stabilising inflation on one hand and stabilising output and employment on the other may keep the BoE in wait-and-see mode for some time to come.
Keep calm and carry on, for now
Despite the mess in Westminster and detrimental political infighting in the two largest parties, market participants have calmed down. This may be partly due to reassuring words by those within Britain's political elite, and the speculations that the Lisbon Treaty's Article 50 may be evoked only after the early election, which may happen as late as next spring.
"Why are the markets up? Aren't we leaving the world's largest trading block?," Augustin Eden at Accendo Markets asked in a note he sent on Wednesday.
". . . Unfortunately the term 'post-Brexit' is being banded around a lot, but we're not there yet. Post-Brexit is years away and the politicians are cleverly stalling the process of, er, starting the process by resigning and stuff like that."
Uncertain leadership
Markets will now be watching very closely who the main hopefuls for the post of prime minister will be and who will actually lead the UK, after David Cameron resigns in early autumn.
The new leader of the Conservative party, and the new prime minister, should be in place by September 9, with some expecting the announcement as early as September 2. Nominations for the new leader closed at noon today.
Much will depend on the new leader, and his or her new approach to negotiations with EU leaders on the future status of the UK in Europe.
Boris Johnson, Theresa May, and Stephen Crabb are thought to have thrown their names into the ring. Other potential candidates include Nicky Morgan, Jeremy Hunt, Andrea Leadsom and Liam Fox, while Chancellor George Osborne, and a staunch pro-Brexit Justice Secretary Michael Gove have ruled themselves out.
The crystal clear message from this week's meeting at the EU Summit in Brussels is that if the UK wants to keep full access to the EU Single Market, it must stick to the rules, which include the free movement of labor – something that UK voters refused when they voted for Brexit.