The RSM Brexit Stress Index, a measure of Brexit-related economic volatility, finished the week at 0.36 compared to 0.34 last week, indicating no change in the mood of the market. Last week’s moderate jump in stress levels for the first time in weeks was thought to potentially represent the start of a more consistent rise in stress levels, but this trend has not yet materialised.
Following an April lull in the markets – when the EU extended Britain’s deadline for departure from the bloc to October 31 – financial market stress reappeared during the run-up to the May 23 election for UK members of the European Parliament and as political affiliation looked to become unglued.
Commenting on the findings, Simon Hart, lead Brexit partner at RSM said:
‘‘This week’s EU elections have added a level of uncertainty, but our Stress Index shows no dramatic reactionary sentiment in the markets last week. We haven’t yet seen the full impact of the ongoing US-China trade war and the wider economic implications for the UK, partly due to the Trump administrations temporary climb down last week. However looking at the medium to long term picture, as the OECD reported this week, these tensions present a major threat to global growth. The pound reacted on Tuesday to the Brexit announcement from PM May so let’s see how the stress index changes as this week draws to a close.’
The currency market appears to be pricing on the greater potential for economic disruptions resulting from a hard Brexit. Interestingly, the equity market performance improved during the week.
The week saw the pound lose another 1.5 per cent in the approach up to the European elections. Of note, there has also been a pickup in currency market volatility throughout the month, though volatility remains at below average levels.
The FTSE 100 recouped 2.8 per cent of its losses since its low point just over a week ago, 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 point. Although the gilt spread remains within normal levels, the recent flattening of the yield curve suggests increasing concerns for 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.
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.