The RSM Brexit Stress Index revealed a decline to 0.08 from 0.41 the week prior, largely due to the likely extension to October 31 for the UK’s departure from the European Union. Consequently the risk of an immediate no-deal Brexit may have abated.
The trend implies broader financial conditions that support economic growth beyond the current rate of less than 1 per cent.
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 – has dropped over two consecutive weeks from a high of 0.77 on 8 March.
Simon Hart, lead Brexit partner at RSM comments: ‘Low currency fluctuations and a narrowing of government and corporate spreads have combined to send the index to the near neutral mark. We have seen some consistency in the easing of strain within the financial markets over the past three weeks since we began the index here in the UK. This could be linked to an element of reduced uncertainty around a so-called hard Brexit and the potential political consensus to form a plan for a soft exit from the EU. Obviously, nothing is certain and anything is possible in the weeks after the Easter break, but right now, the index is on a destressing trend for the UK economy.’
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.