The financial markets appear to have been caught in something of a post-Brexit afterglow. After suffering heavy losses in the immediate wake of the vote to leave the EU, equities have staged a remarkable recovery. Sterling, while well down on its pre-vote levels, has recovered a fair bit of ground. So was all the initial fuss overblown?

Probably not. There are two ways to interpret the markets of recent days. One is some belief Brexit will never happen. With the new prime minister vowing it will, this seems a dangerous assumption.

The second possible reason is a feeling that Brexit may not be so bad after all. This is also highly questionable. Most forecasters expect Britain to enter a period of low growth or recession in the short term. Beyond that, huge uncertainty about the its trading arrangements remain. To gain entry to the European Economic Area – and maintain much of its free trade arrangements – the UK would most likely have to agree to maintain freedom of movement. As it appears not to want to do this, it is not clear what the way forward will be.

In the week ahead two things are likely to hit home. The first is the deterioration in the short-term economic outlook. Recessions are not theoretical concepts, they involve people losing jobs. The second is the incompatibility between keeping free trade arrangements with Europe and restricting immigration. To add one cliché to another, the penny will drop that the UK will not be able to have its cake and eat it. This will have a political impact and will quickly remove any honeymoon factor for the new prime minister. It will surely also have an impact on the markets.

It is hard to see how the post-Brexit rally can be sustained. There will be ups and downs for sure, and big UK-based companies will report higher sterling profits. But lower growth in the UK and uncertainty about the future will also, surely, continue to be reflected in equity and currency markets. It is surely risky to bet too much on the post-Brexit bounce continuing.