UK Financial Conditions Index shows tariff impact

Washington’s attempt to reset global trading patterns through tariffs is already having a material impact on financial conditions for UK businesses and investors.

The RSM UK Financial Conditions Index (RSM UK FCI) – a metric that monitors in near real-time the level of financial stress in the UK’s money, bond, equity and foreign exchange markets – fell to 0.13 from its recent highs of around 1.2.

President Trump’s announcements also saw the two-year run of recovery in financial conditions break, with conditions now verging on ‘restrictive’ territory.

Why has The RSM UK FCI fallen, what does it mean and why does it matter?

The RSM UK Financial Conditions Index (RSM UK FCI) monitors the level of financial stress in the UK’s money, bond, equity and foreign exchange markets. It offers almost real-time insight into financial market movements, helping business leaders and policy makers gauge how shifts might impact the broader economy and its stability.

The drop in The RSM UK FCI reflects a surge in near-term risk as global investors attempt to understand the ad hoc nature of the new tariffs placed on all US trading partners including the UK, which now has a 10% levy on goods exports to the US.

The fall means tighter financial conditions, less credit availability and higher costs. These impact willingness to borrow and to lend and therefore offer insight into likely economic growth in the coming months.

UK yields move lower

Commenting, RSM UK Chief Economist, Tom Pugh, says: “These signs of slippage in The RSM UK Financial Conditions Index reflect global markets’ initial assessment of potential retaliation to the latest round of tariffs by US trading partners and, more important, the effect on their domestic economy.

“As markets absorb the latest shock, UK financial assets may become more attractive to international investors. The UK government also looks far less likely to rush into significant retaliation and faces lower tariffs than other major economies.

“However, corporate yield spreads have started to move higher. Equity market volatility has moved above its long-term average alongside the FTSE 100 shedding roughly 10% in the last few days. At some point, we can expect global investors to run out of patience and move into cash. Indeed, UK yields have already moved lower as investors shift into safer assets while they assess the situation. On the currency markets, sterling’s index with major trading partners slipped slightly, losing ground to the euro, the dollar is now appreciating after initially losing ground to the pound after last week’s announcement.

“If conditions continue to weaken and turn negative it could spell another bout of stagnation for the UK economy, which would otherwise have picked up some steam this year.”

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