The RSM Brexit Stress Index closed slightly higher this week, as political talk centers on whether Boris Johnson, the Conservative Party front runner favored to take over as U.K. Prime Minister, can make good on his promise of removing Britain from the European Union with or without a deal.
The index edged up to 0.26 on Friday from 0.23 a week earlier, staying within its subdued range of the last three to four weeks (see below). It is showing slightly above-average levels of stress, but remains within a normal range for asset-price performance and volatility. Elevated levels of stress in the index indicate a less-accommodative climate for investment and the potential for lower economic growth in the months ahead.
Besides the issue of who will take over after U.K. Prime Minister Theresa May exits, the markets are wrestling with a host of unresolved issues over the future of Britain’s economy. Leo Varadkar, Ireland’s premier, said Friday that a “no-deal” Brexit would have “severe” ramifications for his country’s trade with the U.K., including the imposition of tariffs on all goods imported from Britain.
The pound has lost ground to the euro for eight weeks in a row, and the equity market has been more or less range trading over the last two weeks, with an inter-day pattern of lower highs and lower lows at risk of forming (see Figure 2).
The European Union has extended Britain’s deadline to depart from the bloc to Oct. 31, which leaves months of uncertainty as the EU’s response to future proposals from Britain 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 UK corporate bond spread.
The pound lost another 0.4% of it value during the week, both versus the euro and against its major trading partners. The pound remains 5% lower in value since the local U.K. elections in early May, and the pound’s volatility increased slightly during the week.
The FTSE 100 index gained on late trading, ending 0.2% higher on the week, with volatility rising for the third week in a row (see below).
The yield on 10-year gilts ended the week a single basis point lower after two weeks of small increases. The shape of the gilt yield curve remains a concern, with inversion out through five-year maturities and with the 10-year/three-month gilt spread at only 7 basis points, suggesting concerns for economic growth in the near- and medium-term (see below). Corporate spreads narrowed slightly again, this week by a single basis point.