Global political uncertainly has been plaguing investors around the world for months. With the UK Brexit vote behind us, attention now turns to the US presidential election. In this blog, David Zahn, head of European fixed income, Franklin Templeton Fixed Income Group, looks at the possible implications for international markets as the new incumbent for the White House is revealed. Among other observations, he suggests that should Donald Trump emerge victorious in the November 8 general election, the direction of next year’s Brexit negotiations could be altered. Zahn also looks at the latest developments in the planned Italian constitutional referendum.

When I survey the current investment landscape, I’m struck by the fact that two things are driving financial markets today: central bank policies and politics. Of course, over the longer term, macroeconomic fundamentals will continue to be important, but for now they are taking a backseat when it comes to influencing markets.

Investors around the world are keeping a keen eye on the developments in the US presidential election. My experience talking to investors and investment professionals in Europe suggests that the immediate impact of a Donald Trump victory on markets in those regions could be significant, because people are more concerned about what the Republican candidate would do in office given some of his pre-election rhetoric.

It’s true that no clear, detailed picture of Trump’s policies has emerged, but some observers have interpreted a number of his statements as anti-globalization. He seems also to have hinted that the United States has been too engaged militarily overseas, indicating he might consider scaling back the country’s involvement in organizations such as the North Atlantic Treaty Organization (NATO). Both of these positions seem likely to cause concern among Europeans in particular.

I think, generally, observers underestimate the importance of the United States’ military support for Europe, notably through NATO. For instance, if Europe had to build up its own military capacity to replace the contribution made by the United States, it would place quite a burden on European states, many of which currently spend a relatively small proportion of gross domestic product (GDP) on defense.

Furthermore, there could be implications for the other big political talking point at the moment: the manner of the United Kingdom’s departure from the European Union (EU).

Currently, the United Kingdom is one of the few EU member states to spend 2% of its GDP on defense. So perceived disinterest from an incoming Trump administration in the defense of Europe could prompt EU officials to take a greater interest in ensuring the United Kingdom remains engaged.

Whatever the political landscape in the United States after the November 8 presidential election, it seems likely that the United Kingdom’s Brexit negotiations will prove a talking point for investors for months and years to come.

UK Prime Minister Theresa May has indicated she intends to begin the formal uncoupling of the United Kingdom from Europe by invoking Article 50 of the Lisbon Treaty by March 2017. From my perspective, that’s a strange choice because it would mean embarking on complicated political negotiations during or very close to major election campaigns in Germany and France.

I would question why a leader would start such a potentially bruising process knowing that two of the most important leaders with whom she will have to negotiate will not be focused on Brexit for at least the following six months, and likely even longer in the event of victory by new administrations looking to implement new domestic agendas.

Equally, I would think it unlikely that anyone running for office in France and Germany would want to give the impression that they would give the United Kingdom negotiators an easy ride, which could mean the Brexit talks get off to a challenging start.

So it seems to me, the probability of a so-called “hard Brexit” has increased. In other words, the United Kingdom giving up full access to the single market and full access of the customs union along with the EU.

I think Brexit without trade agreements in place to mitigate the loss of this access to EU markets would likely be negative for the UK economy, but I also think it would be bad for the European economy because of the level of trade between the two. A European economy that is growing only slowly could ill afford to lose such a trading partner, in our view.

There is already evidence that concerns about the manner of Brexit have been reflected in the strength of sterling: it has tended to fall on headlines suggesting Brexit could be tougher than the UK government hopes. I believe “hard Brexit” could prompt further falls, and that might lead to further monetary policy easing.

Optimists point to the relatively positive UK macroeconomic data since the June 23 vote as evidence that the concern over Brexit has been overplayed, but it’s important to remember that nothing has actually happened yet. The United Kingdom remains part of the EU, with all the costs and benefits that membership brings.

With that in mind, we wouldn’t have expected the data to deteriorate right away. Markets and businesses know that a change is coming, and that’s been reflected in reports of some investment tailing off, but in reality most people are just getting on with their day-to-day lives.