The first week of May has proved to be a volatile one for the markets, with debt fears in Europe spreading and a wild day on Wall Street highlighting a tumultuous five day stretch (see Ten Shocking ETF Charts From The “Flash Crash”). With the focus on Greece and controversial bailout plan, one of the largest economies in Europe, Great Britain, has gone relatively unnoticed this week despite holding a key election to determine which party will tackle issues of mounting debt and a fragile economy. The UK held a general election on Thursday to elect all 650 members of the House of Commons and form a government. The incumbent party, led by Prime Minister Gordon Brown, faced a difficult test against the Conservatives (also known as the “Tories”) led by David Cameron and the Liberal Democrats led by Nick Clegg. With nearly all of the results in, it appears as if Brown is likely to be unseated as Prime Minister and replaced by David Cameron of the Conservatives (also read Volatility ETFs: How And How Not To Use).
Currently, according to the Telegraph, 648 of the 650 House of Commons Seats have been decided giving the Conservatives a clear edge over the Labour party 304 to 258. Although the Liberal Democrats finished in a distant third, the 57 seats claimed Thursday give them significant leverage and the title of “kingmaker,” able to align themselves with either party to form a majority. Despite winning only about 40% of the seats, Brown could still maintain his Prime Minister position if he is able to strike a deal with Clegg and another smaller party. “The constitutional conventions are very clear. The rules are that if it’s a hung parliament, it’s not the party with the largest number of seats that has first go – it’s the sitting government,” Lord Mandelson said in a recent report.
Since no one party has a majority of the seats, the election has seemingly resulted in a ‘hung parliament’. The leading parties will attempt to form a coalition with some of the smaller parties in order to help get their bloc over the crucial 326 mark. According to the Telegraph, “there is no formal deadline for when an administration must be formed but a key date is 25 May, when the Queen’s Speech is due to set out the government’s priorities during the Parliament”. The article continued by saying that “negotiations to form a government in a hung Parliament could take between a week and 10 days”. This phenomenon has not happened in Britain since 1974; then the government was not able to form a coalition and new elections were called within eight months (also read Will Hung Parliament Sting UK ETF?).
UK ETF In Focus
The winner may be unclear, but one big loser has already emerged. At a time when risk aversion is running high, uncertainty in the UK is scaring away investors. The main ETF tracking the British equity market, iShares MSCI United Kingdom Index Fund (EWU) has seen its shares slip by close to 13% over the past week (see more information about EWU’s returns). Additionally, the pound ETF has shown weakness, falling below $1.47–down sharply from its 52 week high of $1.70. For ETF investors, the CurrencyShares British Pound Sterling Trust (FXB) is down roughly 1.25% in Friday trading and close to 4.3% over the past week (see more FXB returns). Also make sure to read Forget About Euro ETFs, British Pound ETFs Are The Real Danger.
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Disclosure: No positions at time of writing.