The RSM Brexit Stress Index moved higher again this week, closing at 0.60 from 0.53 last Friday, as the markets digest the resignation of Prime Minister Theresa May, effective June 7. While the index remains within a range of normality in terms of asset-price performance and volatility, it is nevertheless signaling an increase in stress and therefore the potential for a less accommodative climate for the investment decision-making process and economic growth in the months ahead.
The RSM Brexit Stress Index provides a composite measure of the political and economic uncertainty surrounding Britain’s pending departure from the European Union. It is based on sentiment implied by the performance of the financial markets, which for the past month have grown increasingly uneasy. Not only have UK political affiliations been upended, but the markets are dealing with the economic cost of reconfiguring global supply chains within a slowdown and trade disputes.
The European Union extended Britain’s deadline to depart from the bloc to Oct. 31, which leaves months of uncertainty ahead as the political landscape is reshaped.
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 UK corporate bond spread.
The pound lost another 0.3 percent of value during the week against the euro and other major currencies, for a cumulative loss of 3.8 percent since Britain’s May 2 local elections. Currency market volatility has increased throughout the month, though it remains at below-average levels.
The equity market has now dropped in five of the six past weeks. The FTSE 100 lost 1.6 percent in the shortened trading week, and 3 percent since the May 2 elections, with increases in volatility.
The yield on 10-year gilts continues to drop 7 to 10 basis points per week, for a total decline of 33 basis points since the local elections. Although the gilt spread remains within normal levels, the recent flattening of the yield curve to only 9 basis points suggests—at the least—increasing concerns for future economic growth. Corporate spreads widened slightly for the fourth week in a row, signaling heightened perceptions of risk ahead.