Stress in the British financial markets continues to diminish along with the plausibility of the country extracting itself from the European Union common market by the Oct. 31 deadline.
The RSM Brexit Stress Index is lower, but it’s still elevated.
By Friday’s close, the RSM Brexit Stress Index, which measures financial-market stress surrounding Britain’s impending departure from the European Union, had dropped to 0.71 standard deviations above normal levels, down from last week’s close at 0.86 standard deviations and down from the nearly 2.0 standard deviations during August’s darkest days of a suspended Parliament.
Since last Saturday’s landmark session of Parliament, the range of possible negative outcomes seems to have been reduced. That was made possible first by the door-opening talks between Ireland and Britain, and then Parliament’s unwillingness to fast-track a withdrawal agreement that would leave Northern Ireland in limbo.
But not only is there the specter of sectarian violence — after a 20-year absence — there is the unreasonable, if not impossible timetable, for reformulating trade arrangements within any short span of time.
Diplomatically, there is still the possibility that the European Union has lost its collective patience and will deny Parliament’s request for an extension; it might instead politely ask Britain to quickly close the door as it leaves.
And then there are the political machinations that might possibly grant Prime Minister Boris Johnson his wish for a general election in December, where he could potentially amass a majority and restart the momentum for a prompt exit once again. That leaves an indeterminate amount of time for some degree of financial and economic uncertainty to continue.
In the end, the RSM Brexit Stress Index is lower, but it’s still elevated.
Performance of index components
The RSM Brexit Stress Index is made up of six components; they include the British pound-euro exchange rate and its volatility, the FTSE 100 and its volatility, the gilt yield spread and the U.K. corporate bond spread.
The pound ended an up-and-down week on the downside after Johnson’s declared his intentions for a December election. The pound lost 0.3% of its value versus the euro on lower volatility, while losing 0.3% against a basket of its trading partners. The pound’s double-digit loss in value since the April 2015 onset of Brexit fever is likely to contribute to the strain on household balance sheets, which could be a factor in the public’s spending and political decisions.
The FTSE 100 moved higher during the first three days of the week before tailing off a bit and finishing the week 2.4% higher than last week’s close. We would expect volatility to remain higher than normal until the Brexit details are reasonably sorted out.
The bond market remains wary of the potential for economic growth in Britain. The yield on 10-year gilts moved as low as 0.62% on Thursday before closing the week at 0.68% and the yield curve inverted. The corporate bond market maintained its spread over gilts.