Scottish Referendum Throws a Curve at U.K. ETFs

The British pound and United Kingdom stock exchange traded funds plunged Monday in response to rising support for a Scottish independence ahead of a referendum vote scheduled for next week.

The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB) was down 1.1% Monday. Meanwhile, the iShares MSCI United Kingdom ETF’s (NYSEArca: EWU) fell 1.9%, dipping below below its 200-day simple moving average. Year-to-date, FXB has dipped 1.7% and EWU gained 2.3%.

The British markets tumbled Monday after a weekend poll revealed that the number of those in favor of a Scottish independence eclipsed those opposed to a split, with 47% in favor and 45% against, the Wall Street Journal reports.

“The vote has moved from being something three or four weeks ago that we didn’t need to focus on, to something we need to think about [in terms of]how it affects our portfolios,” Paul Lambert, head of currency at Insight Investment, said in the article.

The currency is experiencing an increased bout of uncertainty as it remains unclear what currency an independent Scotland will use – the new country could remain with the British pound, adopt its own currency or petition to enter the euro. Consequently, Citigroup argues that the sterling could fall as low as $1.56 in the event of a yes vote. The British pound is currently trading around $1.61. [Dollar ETFs Rally]

Meanwhile, stocks on the London exchange also faltered on the referendum polling, led down by heavy selling in Scotland-domiciled banks. Lloyds Banking Group (NYSE: LYG), which was down 4.0% Monday, and Royal Bank of Scotland (NYSE: RBS), which was down 3.1%, were among the largest hit during the sell-off. [U.K. Dividends Look Appealing]

BNP Paribas credit strategists Gildas Surry and Geoffroy de Pellegars argued that a vote for independence would “significantly impact” RBS’s credit rating, and increase compliance, operational and funding costs.