British Prime Minister Theresa May's Brexit deal failed in spectacular fashion on Tuesday as members of parliament (MPs) voted 432 to 202 against her proposal – the worst parliamentary defeat for a British government since the 1920s.
With no formal Brexit agreement with the European Union (EU) and the March 29 official "leave" date looming, investors are asking what's next. Several possibilities exist. Firstly, May could revise the original deal with further input from MPs and explore these options with the EU. Secondly, she could decide to hold another referendum – although many consider this to be against the pillars of democracy. The final option is for Britain to leave the EU without a deal, which would likely cause large-scale economic and logistical disruption. According to a Bank of England (BoE) report, a "no deal" scenario could see the U.K. economy contract by about 8% over 12 months, unemployment rise to 7.5%, house prices fall by 30% and the British pound drop below parity against the U.S. dollar.
Other market commenters believe that May might call for an extension of Article 50 – the legal process that sets a time limit for Britain to finalize a deal. However, before the outcome of Tuesday's vote, the prime minister insisted that she would not delay Brexit by extending Article 50, per Bloomberg.
Traders who want to capitalize on the volatility surrounding the continuing uncertainty of Brexit should monitor these three United Kingdom exchange-traded products (ETPs) for trading opportunities as developments unfold. Let's look at each fund more closely.
iShares MSCI United Kingdom ETF (EWU)
Launched back in 1996, the iShares MSCI United Kingdom ETF (EWU) aims to provide similar returns to the MSCI United Kingdom Index. The fund's basket primarily holds large- and mid-cap British companies that trade on the London Stock Exchange (LSE). EWU's ultra-thin spread of just 0.03% and abundant liquidity make it a suitable instrument for short-term traders. As of Jan. 16, 2019, the ETF has a large asset base of $1.8 billion, offers a 4.75% dividend yield and is up 4.16% year to date (YTD). It charges an annual management fee of 0.47%.
The EWU share price spent the first half of 2018 within a trading range before slumping nearly 15% between October and December amid a global market sell-off and Brexit uncertainty. The fund has recently rallied above the 50-day simple moving average (SMA) and a downtrend line dating back to late September. If the ETF's price holds this level, look for a move up to $32, where it finds resistance from a horizontal line connecting several reactionary swing points. Alternatively, if the price stalls, watch for a test of the December swing low at $28.41.
iShares MSCI United Kingdom Small-Cap ETF (EWUS)
The iShares MSCI United Kingdom Small-Cap ETF (EWUS), with $44.05 million in net assets, seeks to track the performance of the MSCI United Kingdom Small Cap Index. As its name suggests, the fund provides exposure to small-cap companies in the United Kingdom with a tilt toward the financial, industrial and consumer cyclical sectors. With only just over 8,000 shares changing hands daily, traders need to be mindful of liquidity. EWUS yields 3.51% and has an expense ratio of 0.59%. The ETF has returned over 7% for the year as of Jan. 16, 2019.
A "death cross" signal that appeared on the EWUS chart in August last year correctly predicted falling prices, with the ETF plunging 20% in the fourth quarter. Buying interest has emerged in early 2019, with the price now trading above an established downtrend line and the 50-day SMA. Traders could see a move up to the next resistance level at $39, where the price finds a test from the November swing high. If the shares reverse, look for support neat the 2018 low.
Invesco CurrencyShares British Pound Sterling Trust (FXB)
Created in 2006, the Invesco CurrencyShares British Pound Sterling Trust (FXB) attempts to deliver exposure to changes in the value of the British pound relative to the U.S. dollar. The fund, with assets under management (AUM) of $135.9 million, holds British pounds in a deposit account. FXB, with its tight spread of 0.02% and $13 million in average daily dollar volume, is suitable for traders who want a cost-effective way to trade the pound. The trust has gained 0.75% YTD and charges a 0.40% management fee as of Jan. 16, 2019.
FXB's share price tracked the British pound lower between April and December in 2018. Like the United Kingdom equity ETFs, the currency trust now sits above a long-term downtrend line and the 50-day SMA. Ironically, the breakout occurred Tuesday – the day the Brexit deal failed.
"Sterling rallied following the defeat of the withdrawal agreement due to strong cross-party support to prevent a no deal from occurring on 29 March," analysts at Australia and New Zealand Banking Group wrote in a morning note cited by CNBC.
Look for the price to rally up to $128, where it finds major resistance from a horizontal line and the 200-day SMA. A stall at the current price could see a return to the $121 level.