The RSM Brexit Stress Index finished the week at 0.02, slightly higher than last week’s value of -0.01, signaling a period of normality in terms of asset price movement and volatility.
The index, which measures UK economic sentiment surrounding Brexit, suggests that stress has declined in 14 of the past 21 weeks since Prime Minister Theresa May barely survived a no-confidence vote in mid-December. In April, the EU gave Britain an Oct. 31 extension for its departure from the bloc.
This week’s local elections — and the prospect of another rebuke to the major parties in the upcoming election for UK members of the European Parliament — could provide a catalyst for ending the political stalemate over Britain’s impending departure from the European Union. The markets appear to be pricing in a compromise that includes a customs union with the EU and minimal disruptions for the economy.
Performance of index components
The RSM Brexit Stress Index is composed 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 UK corporate bond spread.
The pound gained 1.3 percent on the euro in the past week alone and 5.5% since December’s first hint that Brexit might be a political failure. The pound’s gains have occurred within a climate of reduced volatility.
The FTSE 100 lost ground for a second week in a row, as anxiety grew over future Bank of England rate increases. There were also slight increases in share price volatility.
The fixed income market concurred with the optimism of the currency market, as the gilt spread widened a bit, perhaps in anticipation of a satisfactory resolution of Brexit in terms of economic growth. And the medium-term downtrend in corporate spreads that first began in January appears to have been reestablished over what is now the last month and a half, signaling a decrease in the market’s assessment of risk.