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ETF Winners and Losers on ECB's Hawkish Tone

Zacks Equity Research

The investing world saw an upbeat ECB meeting on March 9 as President Mario Draghi signaled the region’s apparent win over deflationary threats. Euro area annual consumer price inflation rose to 2.0% in February, up from 1.8% in January 2017 and 1.1% in December 2016.

Such an inflation reading came in for the first time in four years. In 2016, GDP of the Euro zone grew 1.7% following a 2% expansion in 2015. Draghi thus indicated no “sense of urgency” over the requirement of extra stimulus measures for the Euro zone economy.

Investors took this as the exit of the economy from the crisis-phase and started expecting no chances of stimulus extension. However, the bank kept the rates unchanged at zero percent and said it would continue with its asset-buying program until at least the end of the year.

In the last meeting in December 2016, the ECB announced that it would lower its bond buying program to 60 billion euros a month from 80 billion April onward, but extended the program to December 2017, or beyond, should there be any necessity (read: ECB Trims But Extends QE: ETF Winners & Losers).

Guidance Boosted

The bank now expects headline inflation to be 1.7% at the end of 2017, up from 1.3% estimated in December. Nevertheless, Draghi maintained that the underlying inflation will increase "only gradually" and also indicated that the bank will continue to scrutinize passing changes in inflation. The recent rebound in inflation came on the back of recovering energy prices, with core inflation still hovering around 0.9%.

The ECB also upped the economic growth forecast for 2017 from 1.7% projected in December to 1.8%. However, it appealed to all member countries to intensify reforms to boost growth (read: 3 Reasons to Buy Eurozone ETFs Now).

Market Impact

Following the hawkish tone in the meeting, the euro added 0.7% to touch a weekly high of $1.0615 and the yield on the benchmark 10-year German Bund reached the highest level (0.42%) since early February. The broader Europe ETF Vanguard FTSE Europe ETF VGK gained about 0.8% on March 9, 2017 (read: Will Euro ETFs Stand Steady or Fall Like a 'House of Cards'?).

This happened because investors wagered on the gradual retreat in the stimulus package and a broad-based economic recovery. In fact, Germany has long been in favor of policy tightening. As per Financial Times, markets have now baked in a 68% possibility of the ECB’s raising interest rates by August 2018 — up from 31% last week.

Against such a backdrop, we highlight ETF winners and losers from the ECB meeting.

ETF Winners

CurrencyShares Euro Trust FXE

Investors can play the recent rise in Euro as long as the trend is a friend and the greenback remains subdued. FXE looks to reflect the price of euro in USD and gained about 0.4% on March 9, 2017.

iShares MSCI Europe Financials ETF EUFN

The fund gives exposure to financial companies in Europe. As interest rates started to increase, bank stocks rallied responding to the ECB meet. This financial fund may gain some traction ahead as European banking earnings have also brightened lately. EUFN added about 2.1% on March 9, 2017.

ETF Loser

ProShares German Sovereign/Sub-Sovereign GGOV

As German bond yields rose, bond prices fell, hurting the fund that looks to track the Markit iBoxx EUR Germany Sovereign & Sub-Sovereign Liquid Index. The fund shed about 1.33% on March 9.

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CRYSHS-EURO TR (FXE): ETF Research Reports
ISHARS-MS EU FN (EUFN): ETF Research Reports
PRO-GRMN SOV/SS (GGOV): ETF Research Reports
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