The largest exchange-traded products tracking the United Kingdom’s equity market and currency all fell on Friday, in the wake of an election that analysts deemed the “worst possible outcome” for the country as it prepares to negotiate how it will leave the European Union.
The iShares MSCI United Kingdom ETF EWU, -1.06% fell 1% in its biggest one-day decline since December. While the fund remains up more than 11% thus far this year, it is trading at an one-month low. Volume on the fund, in the first hour of trading, was roughly a third of its 30-day average.
On the currency side, the CurrencyShares British Pound Sterling Trust FXB, -1.70% fell 1.7% in its biggest one-day drop since October. The iPath GBP/USD Exchange Rate ETN GBB, -1.35% fell 1.8% in its largest single-day decline since January. Both sterling-tracking products remain slightly higher on the year.
Prime Minister Theresa May’s Conservative Party won 318 seats in Thursday’s election, well short of the 326 seats needed for a majority and a far cry from the 400-plus seats it was forecast to win a month ago. The results mean the U.K. is headed for a “hung parliament,” where no single party has a majority. May said she would form a new, minority government.
May called the early election in April, in a bid to strengthen her mandate ahead of formal negotiations on the U.K.’s exit from the European Union.
“Ultimately, the lack of a single-party majority may foster greater instability in the U.K. government, potentially leading to another round of elections if the government fails,” Wells Fargo wrote in a note to clients. “We believe that government instability will challenge the U.K.’s power to effectively negotiate its exit from the EU and establish its new relationship with the region. Debates over ‘hard’ versus ‘soft’ Brexit could consume Parliament’s time and energy as efforts toward coalition-building move forward.”
If the government does fail, the investment bank added, that increases the likelihood “of the U.K. simply stumbling out of its EU membership without any sort of agreement in place.”