Global Macro Insights
June 26, 2016
Perella Weinberg Partners Global
Macro is a highly liquid strategy
investing in equity indices,
currencies, sovereign debt, credit,
and commodities.
If you would like to learn more
about Perella Weinberg Partners,
please contact:
Client Services
212.287.3111
[email protected]
The Global Macro Outlook Following the
British Referendum
By Maria Vassalou, Ph.D.
The British decision to exit the European Union (EU) has cast a veil of
uncertainty on the European continent and roiled the financial markets
worldwide on its announcement. The result of the referendum has triggered
a major political process that is likely to unfold over a prolonged period of
time and have significant global economic implications.
This note expands on comments related to the British Referendum made
in the June 21st note1
The “Brexit” is first and foremost a political event
 It is important to remember that the decision to exit the EU is a political
one. As such, the timeline over which the implications of this decision
will play out are determined primarily by the political considerations of
the parties involved.
 The result of the referendum does not determine when the UK will
invoke Article 50 of the Lisbon Treaty to initiate the exit process – it
simply authorizes the British government to do so.
 Given that negotiations can last for two years, unless unanimously
agreed between the two parties to be extended, the UK needs to
carefully time when it will notify the EU of its intention to withdraw.
 The EU cannot force the UK to invoke Article 50 earlier or speed up the
negotiation process, despite the EU Foreign Ministers’ wish to do so.
Political realities suggest that it is optimal for the UK to wait
until after the European elections in 2017 before invoking
Article 50.
 With Prime Minister Cameron’s resignation, the UK has currently a
caretaker government until a new leader of the Tory Party is elected
sometime in the fall. A caretaker government cannot negotiate the
state’s withdrawal from the Union. Therefore, the earliest time at which
Article 50 is likely to be invoked is after the election of a new UK Prime
Minister.
1
Maria Vassalou, “Thoughts on the British Referendum”, PWP Global Macro Insights, June 21, 2016.
1
Global Macro Insights

Given the elections in France, Germany and the Netherlands in 2017, it is optimal for the UK to wait until
after newly mandated leadership is installed in these countries before it initiates negotiations. Failing to
do so risks subjecting the UK to unnecessary political brinkmanship during a pre-election period in these
important Founding Member States of the EU, worsening the outcome it can achieve.
As a result, the uncertainty surrounding Brexit will be prolonged thereby exacerbating the risks of a fallout
among other EU partners, and increasing the probability of an eventual dissolution of the Union.
Key EU players to watch:
Germany: A collected, conciliatory position by the biggest economic and political power of the Union will
reduce the probability of bad outcomes.
France: A fallout between France and Germany will exacerbate the crisis. France is expected to be a hardliner
in the negotiations with Britain.
Italy and Spain: A crisis is an opportunity, and these states are likely to use the current events to renegotiate
the division of powers within the Union. Unlike the European crisis of 2011, these countries are not currently
in the epicenter of the crisis but they can turn out to be beneficiaries of it. Political rhetoric from the North and
South of the EU during such negotiations can polarize the electorate in key member states, adding to the
already elevated political uncertainty.
Economic consequences for Europe: Brexit is a bigger deal for the EU than the UK

Increased uncertainty in Europe will further hinder the region’s already anemic economic growth over the
next 2-3 years.

Periphery Europe is likely to be particularly vulnerable, as political uncertainty will reduce the pace of
economic reforms. Bond yields in Italy, Spain, Portugal and Greece rose significantly following the
referendum decision, whereas those in core Europe fell sharply, particularly in Germany. German 10yr
yields closed at minus 5bps. The increases in yield spreads between periphery and core Europe suggest
that the market fears a rekindling of the European crisis.

The ECB’s inflation target of under 2% is bound to become even more elusive. The Central Bank will likely
have to maintain a highly accommodative monetary policy for longer, potentially necessitating an
expansion of its asset purchases program, in terms of both its length and size.

A sharp increase in yield spreads between core and periphery member states will put the ECB in the eye
of the political storm.
–

Interventions to contain the widening of the spreads will be scorned by the core as they will strengthen
the hand of the periphery. On the other hand, if yield spread widening is left unchecked, the chances
of a breakout of the Union and the Eurozone increase sharply.
Eurozone banks will remain vulnerable due to negative interest rates for longer and lower economic
growth.2
For an analysis on Eurozone banks, see Maria Vassalou and Thomas Cooley, “Eurozone Banks: The Weak Link of the Currency Area”, PWP
Global Macro Insights, April 14, 2016.
2
2
Global Macro Insights
–

The sharp selloff in European banks, together with the yield spread widening and the larger selloffs in
European periphery equity markets vs core, suggests that the market has started pricing again a return
of the 2011 European crisis.
A weaker Euro may boost competitiveness for Eurozone firms, but it comes at the expense of its safe
haven properties for the reasons outlined above.
The UK economy post-referendum

While the increased political and policy uncertainty is expected to be negative for the UK’s economic
growth in the near-term, the sharp fall in the value of the British Pound is likely to cushion the blow.

The long-term effects on the UK economy are virtually impossible to evaluate. The difference in the
agreements that the UK will achieve with its economic partners (EU and rest of the world) are reliant on
political decisions that are yet to be made.

The UK’s exit from the EU will lead to the substitution of various EU policies with policies that are
domestically determined and they are yet to be known. New policies may be more or less business- and
growth-friendly, and will depend on political developments in Britain. With both the Tory and Labour parties
entering a period of internal turmoil, the long-term economic policy direction of the country is hard to
handicap.

Although the U.S. is Britain’s top trade partner, with China gaining in importance over time, eight out of its
top ten trade partners are EU member-states (or affiliates, in the case of Switzerland and Norway.) Figures
1 & 2 provide the details, and suggest that a sharp deterioration of the terms of trade between the UK and
the EU will have significant economic consequences for both sides. This reality should deter both parties
from assuming extreme and punitive negotiating positions. However, in times of political crises, economic
rationale may not always prevail.

The Bank of England has the ability to remain accommodative and support the economy, as needed,
during its transition outside the EU. Interest rate cuts and asset purchases may be reinitiated, adding
liquidity to the economy and keeping the value of the British pound low.
−
Following the referendum result, UK government bond yields fell sharply while UK equities fared better
than continental European equities. This suggests that the market expects a new wave of monetary
accommodation that will contain the negative economic impact of the country’s exit from the EU.
Furthermore, it is consistent with the idea that the blow to the EU may be bigger than that to the UK.
3
Global Macro Insights
FIGURE 1: UK EXPORTS -- TOP 10 TRADING PARTNERS
16%
14%
% of Total exports of UK
12%
10%
8%
6%
4%
2%
0%
2011
USA
Germany
2012
Switzerland
China
2013
France
Netherlands
2014
Ireland
2015
Belgium
Spain
Italy
Source: IMF
FIGURE 2: UK IMPORTS -- TOP 10 TRADING PARTNERS
% of Total imports of UK
16%
14%
12%
10%
8%
6%
4%
2%
0%
2011
USA
Germany
2012
China
France
2013
Netherlands
Ireland
2014
Belgium
2015
Spain
Italy
Norway
Source: IMF
Japan: The unintended negative consequences of Brexit

Abenomics and its three “arrows” of monetary policy, fiscal policy and economic reforms have failed to
revive growth and inflation in Japan. The main reason is that economic reforms were not sufficiently
implemented, leading to a wasteful use of monetary and fiscal policy ammunition. 3
3
For a further discussion on Japan, see Maria Vassalou and Thomas Cooley, “Can Abenomics Succeed in Reviving Growth in Japan?”, PWP
Global Macro Insights, September 15, 2015.
4
Global Macro Insights

Despite the low growth and inflation prospects of the country, its large current account surpluses make
Japan a prime safe haven destination in times of international economic or political turmoil.

The continued strengthening of the Yen, following the British referendum, further strains the ability of
Japanese corporations to compete abroad.
−
The ideal USD/JPY exchange rate for Japanese corporations is around 120. With the Yen
strengthening to 105 Yen to the US dollar, the currency is too strong for them to compete.

The Bank of Japan has largely exhausted its ability to expand its monetary accommodation to spur growth
and indirectly weaken the currency.

Warnings by the US Treasury that Japan is on a watch list of possible future currency manipulators makes
it harder for the Japanese government to intervene in the currency markets without the consent of the G7.

A unilateral intervention by Japan in the currency market is likely to have a very short-lived effect. Even a
coordinated intervention by the G7, in the event that the USD/JPY exchange rate falls below 100, is
unlikely to have lasting effects, if the political and ensuing economic turmoil in Europe continues and
worsens.
In a world of competitive currency devaluations through increasingly accommodative monetary
policies, Japan is set to bear the brunt of the unintended consequences of the British referendum.
The Fed on hold

International turmoil, the strengthening of the US dollar in response to markets’ flight to safety, and soft
recent economic data in the US, are certain to keep the Fed on hold for the foreseeable future.

While we expected the Fed to move again possibly in December, the Brexit result is likely to prevent the
Fed from raising interest rates even in 2017.

The timing and direction of the Fed’s next move will depend crucially on political and economic
developments in Europe.

If events in Europe take a turn for the worse, the Fed’s next move may be an interest rate cut and a new
round of Quantitative Easing (QE). Even in such a case, we believe that the Fed will avoid adopting
negative interest rates, as experiments with these policy tools in Japan and the Eurozone have not
produced encouraging results.
Concluding Thoughts
The only certainty at the moment is that we have entered a period of great political uncertainty that can have
significant economic consequences if it persists and worsens. Such an environment is negative for economic
activity in the short-term and can increase the probability of a global recession if it persists. What is particularly
concerning is that in a world where monetary authorities have largely exhausted their ability to support
economic growth, and the global debt overhang constraints fiscal accommodation, there are scant policy tools
to combat a new economic downturn.
In times like this, it is imperative that cool political heads prevail. The economic consequences of the British
exit from the EU can be greatly minimized if the politics surrounding it are deftly managed.
5
Global Macro Insights
Perella Weinberg Partners Asset Management
Perella Weinberg Partners Asset Management is a leading institutional asset manager. With approximately $8.9 billion
in assets under management as of June 1, 2016 and more than 350 investors globally as of May 1, 2016, the firm seeks
to deliver a diversified suite of alternative investment strategies, as well as comprehensive investment solutions based
on the outsourced CIO investment model.
Maria Vassalou, Ph.D
Partner & Portfolio Manager, PWP Global Macro
Maria Vassalou is Partner and Portfolio Manager for the PWP Global Macro strategy. Dr. Vassalou joined Perella
Weinberg Partners from MIO Partners, a subsidiary of McKinsey & Company, where as a Portfolio Manager she
managed a similar global macro investment strategy in a dedicated legal entity, and as Head of Asset Allocation she
provided counsel on allocation for liquid assets within MIO’s portfolio. Prior to joining MIO, Dr. Vassalou was a Global
Macro Portfolio Manager at SAC Capital Advisors, LP. She joined SAC from Soros Fund Management where she was
responsible for global quantitative research, as well as the development and management of global quantitative trading
strategies. Prior to her career in asset management, Dr. Vassalou was an Associate Professor of Finance at Columbia
Business School which she joined in 1995 and where she established many of the investment principles she employs
today. Dr. Vassalou is a Past President of the European Finance Association and was the Chair of the 2008 European
Finance Association Meetings. She has also served as a Research Affiliate of the Centre for Economic Policy Research
(CEPR) in London for many years and is a past member of the Academic Advisory Board of the Vienna-based Guttmann
Center of Competence in Portfolio Management. Her research focus has been on the interrelation of the macro-economy
and financial markets with applications in hedge fund strategies. A frequent speaker to both academic and practitioneroriented seminars and conferences, Dr. Vassalou has published in leading academic journals, such as the Journal of
Finance, Journal of Financial Economics, Journal of Financial and Quantitative Analysis, Journal of Business, Journal
of International Money and Finance, and the Journal of Economic Dynamics and Control. While she was on the faculty
of Columbia University, she also served as a consultant to many premier hedge funds and asset management institutions
in the U.S. and Europe. Dr. Vassalou received a Bachelor of Arts in Economics from the University of Athens and she
holds a Ph.D. in Financial Economics from London Business School.
Legal Disclosures
The Information has been provided to you by Perella Weinberg Partners and its affiliates (collectively “Perella Weinberg
Partners” or the “Firm” or “PWP”) solely for informational purposes and is not an offer to buy or sell or a solicitation of an
offer to buy or sell any security or to participate in any trading strategy. If any offer of securities is made, it will be pursuant
to the Confidential Offering Memorandum (the “Memorandum”) prepared on behalf of Perella Weinberg Partners which
contains material information not contained herein and which supersedes this Information in its entirety. Any decision to
invest in the investments described herein should be made after reviewing the Memorandum, conducting such
investigations as the investor deems necessary and consulting the investor’s own investment, legal, accounting and tax
advisors in order to make an independent determination of the suitability and consequences of an investment.
The Information including, but not limited to, Perella Weinberg Partner’s organizational structure, investment
experience/views, returns or performance, risk analysis, sample trade plans, idea filtration process, benchmarks,
investment process, investment strategies, risk management, market opportunity, representative strategies, portfolio
construction, capitalizations, expectations, targets, parameters, guidelines, and positions may involve our views,
estimates, assumptions, facts and information from other sources that are believed to be accurate and reliable and are
as of the date this information is presented—any of which may change without notice. We have no obligation (express
or implied) to update any or all of the Information or to advise you of any changes; nor do we make any express or
implied warranties or representations as to the completeness or accuracy or accept responsibility for errors.
Perella Weinberg Partners and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters
contained herein (including any attachments) is not intended or written to be used, and cannot be used, in connection
with the promotion, marketing or recommendation by anyone unaffiliated with Perella Weinberg Partners of any of the
matters addressed herein or for the purpose of avoiding U.S. tax-related penalties.
6
Global Macro Insights
Investing in financial markets involves a substantial degree of risk. Commodity interest trading involves substantial risk
of loss. There can be no assurance that the investment objectives described herein will be achieved. Investment losses
may occur, and investors could lose some or all of their investment. No guarantee or representation is made that the
Funds’ investment program, including, without limitation, its investment objectives, diversification strategies, or risk
monitoring goals, will be successful, and investment results may vary substantially over time. Additional information
about individual holdings is available upon request. Investment losses may occur from time to time. Nothing herein is
intended to imply that the Funds’ investment methodology may be considered “conservative,” “safe,” “risk free” or “risk
averse.” Economic, market and other conditions could also cause the Funds to alter their investment objectives,
guidelines, and restrictions.
Please refer to the Memorandum for more information on fees including early withdrawal charges and other important
information. The investments discussed herein, including any pooled investment vehicle, may be speculative and involve
a high degree of risk; could involve possible loss of your entire principal; may be leveraged which can potentially increase
investment risk; may have volatile performance; can be highly illiquid and investors may be required to retain their
exposure to investments for an indefinite period of time; do not have a secondary market for the investor’s interest and
none is expected to develop; may have restrictions in transferring interests of the assets; may not be required to provide
periodic pricing or valuation information to investors; may include international investments that are subject to political
influences, currency fluctuations and economic cycles that are unrelated to those affecting the domestic financial markets
and may experience wider price fluctuations; are not subject to the same regulatory requirements as mutual funds; may
involve complex tax structures and delays in distributing important tax information; and, may have high fees and
expenses offsetting profits.
7