UK Financial Stress Index – May update

Not out of the woods yet

The UK FSI remained stable at 0.3 in May. Financial stress normalised last month

The index was broadly unchanged in May, continuing its stabilisation after the rise in October due to the UK mini-budget and the developments in the US and European banking sectors. However, the May UK FSI reading still indicates that levels of stress in financial markets are higher than normal.

May brought a mixed bag of news

The unchanged May reading has been due to a mix of fortunes in different financial markets. The index was buoyed by positive developments in May across equity, corporate debt, real estate and short-term funding markets. However, the positive news has been counterbalanced by negative developments in sovereign debt and foreign exchange markets.

Bond markets soured on the UK

Recently, the UK’s government debt yields have increased to similar levels seen last October, ahead of countries like the US and Germany. The UK’s risk premia increased due to higher inflation and interest rate expectations. Despite this, overall financial stress in May is far below the levels seen after the mini budget

The new daily FSI signals a worsening of stress in recent weeks

The UK Daily Financial Stress Index captures the latest financial developments in real time. The index is built similarly to the monthly index but uses daily market data, so some variables have been replaced. Hence, the indices cannot be directly compared but the daily index generates valuable information on UK financial markets in a timelier manner.

The daily index has been driven up by the negative inflation news in the last week which has led the Bank of England to increase interest rates to 5%, more than expected by economists. This has renewed pressures on financial markets, especially on sovereign debt markets, short-term funding and real estate markets, which are more sensitive to interest rate changes.

?

Financial markets in the UK are much better than six months ago, but they are not out of the woods yet.

Resources

For more information, please visit UK FSI webpage.?

Keep up with our analysis by subscribing to The Monday Briefing.

You can also check out our Economic Monitor for the latest data.???