RSM’s Brexit Stress Index remains largely unchanged from last week’s more dramatic near-30 per cent rise in overall stress levels in the UK economy.
The RSM Brexit Stress Index – which tracks the impact of Brexit on trade, wealth, the business cycle and corporate profits, on a week by week basis – remained almost static falling from 0.74 above neutral to 0.72 for the week ending March 29.
The causes of a relatively unchanged score were the narrowing corporate bond spreads, lower volatility of Sterling in foreign exchange markets and an improvement in the FTSE 100 Index. Nonetheless, the stress index stands well above the neutral position of the index one year ago.
To put this into context, it is important to note that the index has declined from over 2 points above neutral in December 2018, mostly due to financial markets pricing in a reduced probably of a hard exit from the EU.
Simon Hart, Brexit lead partner at RSM comments: ‘The tumultuous events of the past couple of weeks politically have understandably put greater downward pressure on the UK economy which were reflected in last week’s index score. At the close of markets on Friday however we have seen far less movement partly due to lower volatility of Sterling in foreign exchange markets and an upturn in the FTSE 100 Index.
‘The next round of indicative votes this week, will kick off what is likely to be an interesting 11-day period leading up to the April 10 emergency EU summit and the April 12 deadline. If the government asks the EU for more time or if an election is called, forward-looking investors and policy makers should anticipate an easing in the top-line stress index. But if the government does not find a majority willing to move in that direction in the coming days, then the top-line stress index will likely increase, along with widening credit spreads, declining equity prices and sterling depreciation.’
The RSM Brexit Stress Index tracks the weekly performance of six variables – the pound/euro exchange rate, the volatility of the pound/euro exchange rate, the performance of the equity market, the volatility of the equity market, the yield curve spread and the corporate yield spread.
These variables are combined into a single measure and assessed against a baseline 'normal' level of stress in the economy. The baseline zero score indicates neither an increase or decrease of stress in the system. The index is designed to give forward-looking investors, business executives and policymakers an instant snapshot of the economic impacts of Brexit.
The RSM Stress Index tracks six variables:
1. British pound/euro exchange rate
An exchange rate measures expectations of relative interest rates and the demand for one currency relative to another due to trade and current account flows.
2. Volatility of the British pound/euro exchange rate
Low volatility suggests a stable environment in which to make investment or trade decisions. A spike to high volatility indicates uncertainty in the market.
3. Equity market performance
In the absence of shocks, stock indices show a tendency to grow over the years. We look at the weekly level of the FTSE 100 Index relative to the same week of the previous year.
4. Equity market volatility
Spikes in the volatility of the FTSE 100 suggest the potential of a shock and an environment of uncertainty.
5. Yield curve spread
A steep yield curve indicates the market expects sustained, long-term growth. A flat yield curve indicates the market is expecting low levels of growth.
6. Corporate yield spread
The corporate yield spread measures the risk of holding a corporate security versus the safety of a risk-free government security. The higher the spread, the more the perceived risk of economic distress and the prospect of corporate defaults.