As expected, the European Central Bank (ECB) turned moderately hawkish in its latest meeting held on Jun 14. While it announced the end of its QE stimulus program by the end of 2018, the bank pledged to keep the record low rates unchanged at least till mid-2019.
The ECB also hinted at moderation in economic growth and the need to keep the policy rate constant. Such a dovish finish to its QE program led the Euro to log its worst day against the greenback in two years.
This is especially true given the recent dollar rally on possibilities of a total four rate hikes in the United States. The dollar fund Invesco DB US Dollar Bullish UUP added about 1.3% on Jun 14 (read: Fed Turns Hawkish: ETF Areas to Win).
Course of QE
The ECB launched its asset-buying program at the start of 2015 and extended the program by six more months to March 2017 at the end of the year. Then the bank announced in December 2016 that it would lower its bond-buying program to 60 billion euros a month from 80 billion from April but extended the program to December 2017.
Then again in October 2017, the ECB extended its asset-purchase program through September 2018 at a reduced rate of €30 billion. Those purchases will now be reduced to €15 billion during the final quarter of 2018.
Inside ECB Guidance
The recent volley of weaker-than-expected economic data probably caused the ECB to maintain a cautious stance. The Eurozone economy grew 0.4% sequentially in Q1 of 2018, following a 0.7% expansion in the previous quarter. The Central Bank has now reduced its 2018 growth forecast from 2.4% projected in March to 2.1%, holding the threats from global trade tensions responsible.
Added to this, a populist threat from Italy's new government and easing in export demand can act as headwinds. However, growth projections for 2019 and 2020 remain constant. Compared with the March 2018 projections, the guidance for employment remained same for 2018, 2019 and 2020.
The organization now forecasts annual HICP inflation at 1.7% for 2018 and 2019 (both up from 1.4% guided in March). The inflation forecast for 2020 was in line with the March estimate. Recovering oil prices and record employment should push prices up in the coming years.
CurrencyShares Euro ETF (FXE)
One of the biggest losers was the euro. A cut in growth projections and dovishness in rate outlook caused FXE to lose about 1.8% on Jun 14.
iShares MSCI Europe Financials ETF (EUFN)
After the meeting, the benchmark German bund yields fell. Since financial stocks are likely to underperform from a falling rate environment, EUFN lost 0.6% on Jun 14.
A weaker euro and lower real GDP growth forecast may not help the domestic-focused, small-cap ETFs. WisdomTree Europe SmallCap Dividend ETF DFE and SPDRÂ EURO STOXX Small Cap ETF SMEZ shed about 0.8% and 0.4% on Jun 14, respectively.
Currency-Hedged Large-Cap Stocks
The continuation of the low rate policy and a weaker Euro should boost the currency-hedged Euro zone ETFs in the near term. iShares Currency Hedged MSCI Eurozone ETF (HEZU) and Xtrackers MSCI Eurozone Hedged Equity ETF (DBEZ) added about 1.6% and 1.4%, respectively, on Jun 14.
Amid low rates, demand for high-yielding products should grow. So, investors can bet on ETFs like First Trust STOXX European Select Dividend Index Fund (FDD) (up 0.1% on Jun 14 and yields about 2.97% annually) and ProShares MSCI Europe Dividend Growth ETF EUDV (up 0.2% on Jun 14 and yields 2.27% annually) (read: 5 Europe ETFs With Great ESG Scores).
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PWRSH-DB US$ BU (UUP): ETF Research Reports
CRYSHS-EURO TR (FXE): ETF Research Reports
ISHARS-MS EU FN (EUFN): ETF Research Reports
DEUTS-XT MS EMU (DBEZ): ETF Research Reports
PRO-SH EUR DV G (EUDV): ETF Research Reports
WISDMTR-EU SC D (DFE): ETF Research Reports
ISHARS-CH MS EM (HEZU): ETF Research Reports
FT-STX EURO SEL (FDD): ETF Research Reports
SPDR-EU STX SC (SMEZ): ETF Research Reports
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