The RSM Brexit Stress Index closed lower for the third week in a row, as the British economy contends with an uncertain political future nearly a month after Prime Minister Theresa May’s announced resignation.
The composite index—which measures economic stress surrounding Britain’s pending departure from the European Union—moderated to 0.23 on Friday from 0.24 a week earlier (below chart).
The index reflects slightly above-average levels of stress, but remains within a range of normality in terms of asset-price performance and volatility. Elevated levels of stress indicate a less accommodative climate for investment and the potential for lower economic growth in the months ahead.
The currency market traded sideways again and the equity market popped higher but by only 0.8% as the competition for Conservative leadership narrowed. Boris Johnson, a Member of Parliament and London’s former mayor, remains the front runner for Prime Minister. His closest rival is Secretary of State Jeremy Hunt. According to Bloomberg, the race “has seen a hardening of rhetoric around leaving the European Union.”
The bond-market decline also paused, but bonds continue to signal anticipation of economic disruption and slower growth. Since May barely escaped a no-confidence vote in mid-December of 2018, the yield curve has moved closer to being inverted, with two-year gilt yields losing nearly 20 basis points, five-year yields falling by 30 basis points, and 10-year gilts dropping by nearly 50 basis points (below chart).
The European Union has extended Britain’s deadline to depart from the EU bloc to Oct. 31, which still leaves months of uncertainty over whether the threats of a no-deal Brexit materialize and the EU’s response becomes clearer.
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 lost 0.3% on the week against the euro for a cumulative loss of 4.8% since the May 2nd local elections. There was a very slight drop in currency market volatility during the week.
The FTSE 100 gained 0.8% during the week, with a slight increase in volatility.
The yield on 10-year gilts ended up flat on the week and the 10-year/three-month yield-curve spread was 5 basis points, suggesting concern for future economic growth. Corporate spreads decreased slightly for the third week in a row.