The Euro zone indicated on Jul 25 that it could resort to
new stimulus measures to boost its ailing economy as soon as in the September meeting. The stimulus moves could include cutting rates even further and other expansionary measures. However, ECB president Mario Draghi toned down the risk of recession in the Eurozone.
Euro zone inflation has fallen short of the ECB's target for the past six years. After the continued underperformance, the target was “considered to be symmetric - or to extend on both sides of 2% - and there would be no cap at 2%”. The ECB noted that the outlook looked dull as a
global trade war cut back on Europe's export-focused manufacturing sector.
Giving signals of a rate cut, the ECB said it sees rates at present or even lower levels through mid-2020, marking certain change to its prior statement to keep rates unchanged through next June. Per Draghi, “the ECB could also compensate banks for even lower rates by offering a
multi-tier deposit rate.”
While such dovish comments should have weighed on the euro, in reality, the Euro zone common currency gained on Jul 25.
Invesco CurrencyShares Euro Currency Trust ( FXE Quick Quote FXE - Free Report) added about 0.1% on the day. Why Euro Gained?
Mario Draghi delivered a mixed message in a subsequent press conference, suggesting that some members of the central bank are still not convinced on certain facets of a possible stimulus package. Also, Draghi’s comments over “low recession risk” in the region charged up the common currency. Euro-dollar overnight implied volatility rose to above 14 on Jul 25,
its highest reading since June 2018 according to Bloomberg data. What Lies Ahead?
Investors should note that German 10-year bond yields have undergone a record number of days of sub-zero figures. It reinforces the latest sign of how
deep-rooted the expectations for weak inflation and ultra-low interest rates are there in the Euro zone.
Though initial reaction of the ECB meeting was a euro gain and slump in equities, the region’s stocks and equities may rally if there are more stimulus measures in September. “Money markets
price in a 10 basis point cut in the ECB’s minus 0.40% deposit rate in September and a further cut is priced in by next March”, per Reuters.
If the ECB rolls out more stimulus, the following ETFs will be the gainers.
Since yields and bond prices are inversely related, the fund
iShares International Treasury Bond ETF ( IGOV Quick Quote IGOV - Free Report) (which has a sizable exposure to Europe) should gain ahead. Currency-Hedged Large-Cap Stocks
The continuation of the low-rate policy and a weaker Euro (after the likely rollout of stimulus) should boost currency-hedged Euro zone ETFs like
iShares Currency Hedged MSCI Germany ETF ( HEWG Quick Quote HEWG - Free Report) and Xtrackers MSCI Eurozone Hedged Equity ETF ( DBEZ Quick Quote DBEZ - Free Report) . Dividend
Amid low rates, demand for high-yielding products should grow. So, investors can bet on ETFs like
WisdomTree Europe SmallCap Dividend Fund ( DFE Quick Quote DFE - Free Report) (up yields about 3.98% annually). Minimum Volatility
In an edgy economic situation, low-volatility ETFs like
iShares Edge MSCI Min Vol Europe ETF have every reason to perform better (read: Time to Buy Global Low-Volatility ETFs?). Want key ETF info delivered straight to your inbox?
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