The RSM Brexit Stress Index finished the week at 0.36, virtually unchanged from last week’s close. Although the index remains within a range of normality in terms of asset price movement and volatility, there were nevertheless signs of increased stress in the majority of markets.
The index measures UK financial sentiment surrounding Brexit and the impact of financial-market stress on investment decisions and future economic growth. After an April lull in the markets — when the European Union extended Britain’s deadline to depart from the bloc to Oct. 31 — financial-market stress reappeared during the run up to the May 23rd election for UK members of the European Parliament and as political affiliation looked to become unglued.
In this latest period of index performance, the currency market appears to be pricing in the greater potential for economic disruptions resulting from a hard exit by Britain from the European Union. Interestingly, the equity-market performance improved during the week.
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 lost another 1.5 percent of its value during the week, for a total 3 percent loss since the currency markets began pricing in the political uncertainty in the run up to the local and EU elections. Of note, there has also been a pick up in currency market volatility throughout this month, though volatility remains at below-average levels.
The FTSE 100 recouped 2.8 percent of its losses since a low on Monday, with a concurrent drop in volatility over the week. This counterintuitive equity market correction could perhaps be in response to the downturn in the bond market.
The yield on 10-year gilts dropped another 10 basis points in the past week, for a total drop of 22 basis points since mid-April’s high. Although the gilt spread remains within normal levels, the recent flattening of the yield curve suggests — at the least — increasing concern over future economic growth. Corporate spreads also rose slightly above last week’s level, which is confirmation of the bond market pricing in the potential for more risk ahead.
