The RSM Brexit Stress Index finished the week at 0.34, up from last week’s close at 0.02. Although remaining within a range of normality in terms of asset price movement and volatility, financial market stress is nevertheless inching higher again.
Until three weeks ago, the index, which measures UK economic sentiment surrounding Britain’s pending departure from the European Union, indicated that stress had been declining since Prime Minister Theresa May survived a no-confidence vote in mid-December. But as a May 23rd election for UK members of the European Parliament approaches, and political affiliations look to become unglued, financial market stress is on the rise.
This week’s change in sentiment was particularly notable in the currency market, which appears to be pricing in the diminished probability of a Tory-Labour compromise, and the greater potential of a hard Brexit result.
The pound, which had been gaining since December 2018, lost 1.4 percent of its value versus the euro in the last week, while still trading within a period of reduced volatility.
Performance of other 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 FTSE 100 has now lost 4.25 percent since April 23, most likely on concerns over political outcomes, which were also reflected in this week’s increase in share price volatility.
The fixed income market also began again to price in more concern over the eventual outcome of Brexit and its effect on the economy. The yield on 10-year gilts fell below last week’s level and the gilt spread narrowed over those growth concerns. And this year’s downtrend in corporate spreads was disrupted, perhaps the first signal of an increase in the bond market’s assessment of risk after a lull.
In April, the European Union extended Britain’s deadline to depart from the bloc to Oct. 31.