The RSM Brexit Stress Index closed lower for the second week in a row, following the resignation of Prime Minster Theresa May last month and an uncertain political future for the U.K.
The composite index—which measures economic uncertainty surrounding Britain’s departure from the European Union—moderated to 0.24 on Friday from 0.40 at the end of last week
The index remains at slightly above-average levels of stress, but within a range of normality in terms of asset-price performance and volatility. Elevated stress levels indicate a less accommodative climate for investment and the potential for lower economic growth in the months ahead.
With the passing of each milestone, including the Conservative Party’s rebuke of May and local U.K. and EU elections, the markets appear to fear the worst and then take a moment to absorb whatever political debris is thrown at them.
Still, the damage might have already been done: the pound remains about 20 percent below its value versus the euro relative to April 2015 (when the Conservatives took power on a pledge to leave the common market) and the flatness of the bond market yield curve suggests the potential for the UK slipping into recession.
The European Union has extended Britain’s deadline to depart from the bloc to October 31, which leaves months of uncertainty ahead as the UK political shake-up continues and the EU’s response becomes clearer. The next mini-crisis is likely to revolve around choosing a new Prime Minister and whether or not the threats of a no-deal Brexit materialize.
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 closed even on the week against the euro and other major currencies, for a cumulative loss of 4.5 percent since the May 2 local elections. There was a slight drop in currency market volatility during the week.
The FTSE 100 gained and lost about 1 percent of its value during the week, maintaining and then finally adding an additional 0.2 percent to the previous week’s gains, with a slight drop in volatility.
The bond market provided the most interest in the week. The yield on 10-year gilts, which had dropped by 7-10 basis points in each of the previous five weeks, moved 3 basis points higher. The 10-year/three-month yield curve spread is only 6 basis points, suggesting concern for future economic growth. Corporate spreads were slightly lower than last week, after five consecutive weeks of higher risk being priced into the market.
