Where has the political risk premium gone?

As U.K. Prime Minister Theresa May plotted with her cabinet this weekend about the country's plan for Brexit, doomsday-predictors should have every reason to be amazed at where asset prices sit today.

Funnily enough, market-savvy Brexiteers I spoke to in the aftermath of the vote were surprised but sanguine, saying markets always overreact. Clearly, in the short term, they were right, with the reaction to Brexit unexpectedly benign. Though I do think it's worth asking whether investors have become too complacent about political uncertainty as a result.

And here we are two months on and investors seem more relaxed about political risk than they were pre-vote.

My greatest fear was that the vote would reinforce anti-establishment movements elsewhere in the world and in particular in Europe – with further calls for referendums on the future of the European Union. Think the Netherlands, Finland and France with the rise of the National Front. However, in fact so far only PM Viktor Orban of Hungary has followed the U.K.'s suit with a referendum set for October but otherwise the noise quickly died down.

Italian referendum

Fear risk surfing
David Gray | Reuters

Last month I spoke to PM Matteo Renzi of Italy about the country's constitutional reform referendum. He has suggested in the past that, if he loses this vote, he will resign and nothing he said to me recently convinced me otherwise. Italy has had 63 governments in 70 years so greater stability is desperately needed, yet voters are pretty evenly split according to the polls. It could go either way.

Why aren't investors more concerned? Especially when you consider that Italian banks faced huge selling pressure in the aftermath of the Brexit vote amid fears of a need for a larger scale bailout. In my mind, these things haven't gone away and the last thing the country needs is political upheaval at this moment.

US presidential election

Italy isn't the only consideration in fourth quarter. Let's discuss the US election. According to the polls, the likelihood of Donald Trump winning is equally as unlikely as a Brexit win was two months ahead of the referendum. Didn't Brexit teach us not to count our chickens? Yet investors seem totally non-plussed.

Perhaps Donald Trump has scared people enough that he's thrown his chance away? Perhaps it is the fact that we don't know what kind of president Trump would make. We can definitely question whether he will really be at daggers drawn with China, will the Mexican Wall really be built, is NATO really so unimportant in his eyes? We don't really know and maybe there is no need to care as markets seem to suggest..

On the plus side either presidential choice will likely bring further fiscal spending and that's a reason for markets to rejoice.

Monetary and fiscal policy

It would be foolish to suggest the buoyancy in markets is purely fueled by complacency, particularly when a rally feels unloved. In fact, the real data so far in the U.K. seem to suggest that the fears of a collapse in the economy predicted by the surveys were greatly exaggerated – for now at least.

The same is true in Europe. And where central banks are concerned, the belief is that lower for longer rates could very easily be lower for just about forever. Political risk was also washed away by the continued waves of monetary stimulus. There's also more and more talk of fiscal spending support around the world not only from U.S. electoral candidates but also from the UK govt, Japan and in Europe.

The only central bank that could reverse the mood this year is the Fed. Janet Yellen acknowledged the improvement in the US economy at Jackson Hole last week and that message was strengthened by Vice Chair Stanley Fischer. Yet most analysts and investors believe that a hike will come in December or later. Another reason to hold your nose and buy.

Julia Chatterley is a CNBC anchor and European reporter covering key business and political events, as well as regular Eurogroup and EU leaders summits in Brussels. Follow Julia on Twitter: @JChatterleyCNBC

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