RSM Stress Index levels out

The RSM Stress Index, a measure of Brexit-related economic volatility, was close to flatlining as it finished the week at 0.01 points below zero, marginally up from last week’s 0.16.

Brexit Stress Index 

Overall, stress levels have declined in 14 of the past 20 weeks since its December 2018 peak, so whilst the marginal level of change this week provides little in terms of longer-term foresight, it does nonetheless mark the first time in a number of weeks whereby the downward trajectory has eased. 

Commenting on the findings, Simon Hart, lead Brexit partner at RSM said:

‘These latest readings reflect a period of normality in the financial markets in terms of asset price movements and volatility following the Easter bank holiday period.

'This period of normality seems most likely a response to the political stalemate ahead of the EU and local elections, so the index appears to be waiting for the next shoe to fall. All things considered, the markets may be counting on a soft exit or perhaps a second referendum.

‘The pound continues to trade sideways within a climate of reduced volatility; the FTSE100 lost about 1.3 per cent since last weeks peak, with a marginal increase in volatility; and in the fixed income market the gilt spread narrowed slightly but within normal levels, which probably suggests a satisfactory resolution in terms of economic growth.’

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.