The RSM Brexit Stress index remained essentially unchanged falling from .74 standard deviations above neutral to .72 for the week ending March 29. The primary catalysts for the relatively unchanged score were narrowing corporate bond spreads, lower volatility of British Sterling in foreign exchange markets and improvement in the FTSE 100 index. Even so, the stress index stands well above the essentially neutral stance of the index one year ago.
In our estimation, the failure of the May administration to advance a third attempt to pass its preferred plan to exit the European Union is the primary result of higher equity prices and reductions in the cost of holding domestic corporate debt and sterling based currency positions.
Given the traditional lack of action in the U.K. Parliament during weekends, the next round of indicative votes on Monday, April 1, will kick off what is likely to be an interesting 11-day period leading up to the April 10 emergency EU summit and the April 12 deadline. If the government chooses to ask the EU for “Brextra Time,” or if an election is called, forward-looking investors and policy makers should anticipate an easing in the topline stress index. But if the government does not find a majority willing to move in that direction in coming days, then the topline stress index will likely soar, along with widening credit spreads, declining equity prices and sterling depreciation.