Commentators have gone into overdrive discussing what impact a "no deal" Brexit outcome would have on the United Kingdom, but how would this scenario impact the European Union (EU)? According to the International Monetary Fund (IMF), economic growth would constrict up to 1.5% across the remaining EU states by 2030 if a deal can't be reached between Westminster and Brussels before the March 29 "leave date" deadline.
Although EU-U.K. trade is smaller relative to the EU economy than it is to Britain's, a no deal Brexit coincides with the worst economic slowdown in Europe since the euro crisis of 2011 and 2012. If the EU economy took a turn for the worse, the bloc's central bank, the European Central Bank (ECB), has limited policy options at its disposal with an already negative deposit interest rate.
Despite the genuine possibility of a hard landing Brexit, it's appearing more likely that British Prime Minister Theresa May's revised Brexit deal will succeed, provided that see gives assurance that the Irish backstop, an insurance policy that ensures there is no hard border in Ireland, would only be temporary.
"As long as the attorney general [Sir Geoffrey Cox] is able to assure the House that he has a legally binding guarantee that the backstop can only be temporary, I would accept that and would urge others to accept it," prominent conservative Member of Parliament (MP) Sir Graham Stuart Brady said, per the Guardian. Critics of the backstop, a sticking point in the first failed Brexit deal, believe that it could leave the United Kingdom indefinitely tied to the European Union from a customs perspective.
From a technical standpoint, these three European country exchange-traded funds (ETFs) have found buying support in recent trading sessions, suggesting that the market is betting against a no deal Brexit outcome. Let's consider several trading ideas as negotiations continue.
iShares MSCI Germany ETF (EWG)
Created back in 1996, the iShares MSCI Germany ETF (EWG) aims to track the price and yield performance of the MSCI Germany Index. The fund, which holds 67 stocks, provides exposure to German mid-cap and large-cap companies with a tilt toward the financials and consumer cyclicals sectors. Significant allocations include SAP SE (SAP) at 8.82%, Allianz SE (AZSEY) at 8% and Siemens Aktiengesellschaft (SIEGY) at 7.07%. EWG appeals to traders with its sizable $2.33 billion asset base and razor-thin spread of just 0.04%. As of March 4, 2019, the fund charges a moderate expense ratio of 0.47%, yields 2.77% and is up 7.69% on the year.
EWG's share price has formed an inverse head and shoulders pattern over the past four months that indicates a bottom may be in place. The fund closed above the pattern's neckline on Friday, March 1, which provides breakout traders with a swing trading opportunity. Those who go long here should look for an initial move to between $28.50 and $29, where the price may encounter resistance from the 200-day simple moving average (SMA) and a trendline connecting the August and September 2018 swing lows. Consider placing a stop-loss order just below the breakout level to protect against a sudden reversal.
iShares MSCI Belgium Capped ETF (EWK)
With net assets of over $45 million, the iShares MSCI Belgium Capped ETF (EWK) provides similar returns to the MSCI Belgium IMI 25/50 Index. The fund's top holding – Anheuser-Busch InBev SA/NV (BUD), the makers of Budweiser and Corona – accounts for over 20% of the portfolio. Bank insurer KBC Group NV (KBCSY) claims the next highest allocation at 10.33%. The ETF's average spread of 0.19% is a little wider than EWG's, but average daily dollar volume of nearly $500,000 provides ample liquidity to enter and exit positions. EWK has a year-to-date (YTD) return of 10.10% as of March 4, 2019. The fund charges a 0.47% management fee and pays a dividend of 2.56%.
Like EWG, the fund's share price has formed an inverse head and shoulders pattern over a four-month period. Traders who buy Friday's breakout should be mindful that the price is approaching the 200-day SMA, where it may find some overhead resistance. The relative strength index (RSI) gives a reading of nearly 67.69, also suggesting short-term overbought conditions. If the fund pushes through this level, however, look for a test of other key resistance areas at $19.25 and $20.40. Protect open positions with a stop just below the neckline of the inverse head and shoulders pattern.
Global X MSCI Greece ETF (GREK)
The Global X MSCI Greece ETF (GREK), formed in 2011, seeks to track the investment results of the MSCI All Greece Select 25/50 Index. The benchmark represents the broad Greece equity universe. To be included in the underlying index, companies must be headquartered or listed in Greece and carry out the majority of their operations in the southern European country. GREK's top 10 holdings command a cumulative allocation of 60%, making its portfolio relatively concentrated.
Top stocks in the basket include Hellenic Telecommunications Organization S.A. (HLTOY), Alpha Bank A.E. (ALBKF) and Greek Organization of Football Prognostics S.A. (GOFPY). The fund provides adequate liquidity and reasonable spreads for traders who think the country's government debt crisis is well behind it. GREK, with assets under management (AUM) of $239.14 million and offering a 2.29% dividend, is up over 14% YTD as of March 4, 2019.
The ETF's chart looks the most promising of the three, with a double bottom pattern forming between October and February. The pattern's second swing low made a lower low, while the RSI indicator's second swing low made a higher low – referred to as a bullish divergence, giving further conviction to the bulls. Traders should look for a pullback entry at the $7.75 level, where price finds support from the double bottom pattern's neckline. Think about positioning a take-profit order near $8.75 – an area the fund may run into resistance from a horizontal line stretching back across previous price action. Place a stop under the February low to protect trading capital.