Brexit 101: 7 Ways To Trade The Vote On Thursday
Zacks Investment Research | Jun 21, 2016 12:28AM ET
Thursday will be a historical for both the United Kingdom and the global economy. On June 23rd the British people will decide whether to leave or stay in the European Union. Polls have been mixed over the last couple months, but the latest out show momentum for remaining, which is has brought some calm to the markets.
The Polls
Listedbelow are the latest polls out Monday afternoon and Tuesday morning. They are leaning towards remain, but some polls are showing “leave” with a slight chance.
ORB/Telegraph poll: 53% for remain, 46% for leave
YouGov/Times poll: 42% for remain, 44% for leave
National Centre/Financial Times poll: 53% for Remain, 47% for Leave
Survation poll for Daily Mail: 45% for remain, 44% for leave
Ladbrokes (LON:LAD) Brexit odds: "Remain" camp at 2/9 "Leave" camp at 10/3
The Vote
Loss of British sovereignty is the fundamental reason for leaving the EU, as many supporters want to take back control of U.K. borders in order to curb immigration. Those that wish to stay in the EU say there are severe short-term economic consequences that would make trade difficult and slow the economy. Even President Obama recently said that if there is a Brexit, the U.K. would go to the “back of the queue” in American trade deals.
While debate and speculation is running rampant, markets are watching the British Pound closely. Over the past couple weeks U.S. indices tracked and moved with the Pound tick for tick, showing that traders are positioning with the latest sentiment.
Since the shooting death of lawmaker Jo Cox last Thursday, sentiment shifted from bearish to bullish on the British Pound. The thinking has been that voters wouldn’t want to associate themselves with the shooting in which the assassin yelled “Britain First”, implying a pro Brexit stance. Markets took this as a signal that “Remain” would win and the Pound has surged over 5% since.
So how can you profit off the news when it hits? Below I show seven different ETF/ETNs to buy in anticipation of either a “Yes or a “No” vote.
Volatility
When markets are faced with uncertainty, volatility rises. The VIX is a fear gauge that measures how much fear there is in the markets at the current moment. Traders will buy VIX instruments to hedge against panic or bet on a move lower in the market. One of the most popular VIX instruments is the iPath SP 500 VIX Short-Term Futures ETN (VXX). This ETN provides investors with exposure to short-term VIX futures. Essentially, when the market goes down and fear increases, it will go higher.
Get The News You Want
The chart below shows VXX over the last month versus the S&P 500. As Brexit fears have increase over the last month, we have seen the VIX shoot higher and the market soften. Investors can expect volatility to remain firm into the vote and surge higher if the vote is yes. However, if the vote is no, expect volatility to fall apart and VXX to go right back to the June lows.
The Trade: If you believe it’s a yes vote buy VXX or UVXY (2x long VIX). If you believe it’s a no vote buy SVXY (Short VIX).
Yes (Leave) Vote
SPDR Gold Trust (GLD (NYSE:GLD))seeks to reflect the performance of gold bullion. The Trust holds gold bars and from time to time, issues Baskets in exchange for deposits of gold and distributes gold in connection with redemptions of Baskets.
In times of uncertainty gold thrives. A Brexit would create uncertainty about the euro zone economy, the stability of the EURO and would set a precedent for other countries to leave the EU.
Gold has already been very strong this year with the ECB and Bank of Japan experimenting with negative interest rates. A yes vote could push gold much higher as currency fears force traders to buy the yellow metal.
Guggenheim Currency Shares Japanese Yen ETF (FXY) is an investment that seeks to track the Japanese Yen. Traders will buy the Yen in expectation that it will rise against the Euro, the Pound and the Dollar. Yen momentum has been a concern and a risk-off type scenario could give the currency an extra push higher as global markets head lower.
Direxion Daily Financial Bear 3x (FAZ) is an investment that seeks daily investment results, before fees and expenses, of 300% of the inverse of the performance of the Russell 1000® Financial Services Index,
This is a good play, not only on a Brexit yes vote, but also the Feds reaction to the Brexit. Yellen has mentioned that the vote is a concern and a yes vote will most likely create turmoil that would prevent any fed rate hike until December. Low rates are killing banks, expect FAZ to head higher on the expectation on more delays on any rate hike, plus heightened fear of economic turmoil.
The Trade: Long GLD, FXY, and FAZ if trader believes “Yes” vote is coming.
No (Remain) Vote
Guggenheim Currency Shares British Pound Sterling (FXB)is a currency ETF that reflects the British pound and its daily movements. The Pound has come under pressure this year in anticipation of this vote. While some of the move might be priced in, there could be a lot more room to go lower if there is a Yes vote. However, it they stay in the EU, there will be a massive rally in the pound and FXB will shoot higher.
iShares MSCI United Kingdom (EWU) is an investment that seeks to track the investment results of the MSCI United Kingdom Index. The fund will at all times invest at least 90% of its assets in the securities of its underlying index and in depositary receipts representing securities in its underlying index.
Expect U.K. stocks to rally if there is no Brexit. The risk has held the index down so far this year and if that risks goes away we could see money flow into U.K. stocks.
Direxion Daily Small Cap Bull 3x(TNA) is a way to play US stocks through the Brexit vote. Expect a large rally if there is a no vote and the best performing stocks to be the riskier or small cap stocks. TNA gives an investor triple exposure to this idea so they can profit of a big move in the Russell 2000 index.
The Trade: Long FXB, EWU, and TNA if trader believes a “No” vote is coming.
In Summary
It’s hard to speculate which way the British people will go as the polls have been all over the place, but the current sentiment is for them to stay in the EU. Expect the market to remain volatile as new polls and headlines come out. When the final vote is known there will be a violent move in response to the vote, with a “Leave” vote being bearish and “Remain” being bullish for stocks. Use the above instruments to trade your opinion and even protect your portfolio for that June 23rd vote.
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