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ECB Hikes Rates to Highest in 22 Years: ETFs to Play
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The European Central Bank (ECB) announced on Thursday that it raised its main rate by 25 basis points to 3.5%. The decision marks a continuation of the rate-raising cycle initiated by the ECB in July 2022, aimed at curbing the record-high inflation rampant across the region.
Despite a faster-than-expected cooling in prices, with May's headline inflation reported at 6.1% and core inflation — excluding volatile items — at 5.3%, these figures significantly overshoot the ECB’s target of 2% headline inflation.
Uncertainty Regarding Future Moves
Although the market widely expected Thursday’s decision, uncertainty looms large regarding the future trajectory of ECB's rate policy beyond summer. Even amid cooling inflation, the ECB raised its headline and core expectations for this and the upcoming year. The bank now predicts headline inflation at 5.4% this year, 3% in 2024, and 2.2% in 2025.
Bearish Outlook for Growth
In contrast, the ECB revised its growth projections downward to 0.9% for this year and 1.5% in 2024, as compared to the previous estimates of a GDP growth rate of 1% this year and 1.6% in 2024. This more pessimistic outlook reflects heightened concerns over the region's economic performance.
Market Reactions and International Comparisons
The Euro strengthened against the U.S. dollar, and European bond yields increased following the announcement. This came in the aftermath of the Federal Reserve's decision to maintain rates, hinting at the decoupling monetary policies of these significant economic players.
No Pause in Sight
Market players have been speculating whether the ECB will conclude its rate-hiking cycle when its deposit rate reaches 3.75 or 4%. Given the technical recession in the 20-member area in the first quarter of this year, this question gains prominence. However, ECB officials have indicated that controlling inflation is more critical than avoiding an economic slowdown.
Against this uncertain scenario, betting on some Europe ETFs, braving the series of rate hikes and high inflation, could be an intriguing idea. Some of these ETFs have lower P/E than the S&P 500-based ETF SPY (i.e., 17.86X).
ETFs in Focus
ProShares MSCI Europe Dividend Growers ETF (EUDV - Free Report) ) – Up 13.9% YTD; P/E: 19.83X
WisdomTree Europe Quality Dividend Growth Fund (EUDG - Free Report) ) – Up 12.5% YTD; P/E: 15.66X
Image: Bigstock
ECB Hikes Rates to Highest in 22 Years: ETFs to Play
The European Central Bank (ECB) announced on Thursday that it raised its main rate by 25 basis points to 3.5%. The decision marks a continuation of the rate-raising cycle initiated by the ECB in July 2022, aimed at curbing the record-high inflation rampant across the region.
Despite a faster-than-expected cooling in prices, with May's headline inflation reported at 6.1% and core inflation — excluding volatile items — at 5.3%, these figures significantly overshoot the ECB’s target of 2% headline inflation.
Uncertainty Regarding Future Moves
Although the market widely expected Thursday’s decision, uncertainty looms large regarding the future trajectory of ECB's rate policy beyond summer. Even amid cooling inflation, the ECB raised its headline and core expectations for this and the upcoming year. The bank now predicts headline inflation at 5.4% this year, 3% in 2024, and 2.2% in 2025.
Bearish Outlook for Growth
In contrast, the ECB revised its growth projections downward to 0.9% for this year and 1.5% in 2024, as compared to the previous estimates of a GDP growth rate of 1% this year and 1.6% in 2024. This more pessimistic outlook reflects heightened concerns over the region's economic performance.
Market Reactions and International Comparisons
The Euro strengthened against the U.S. dollar, and European bond yields increased following the announcement. This came in the aftermath of the Federal Reserve's decision to maintain rates, hinting at the decoupling monetary policies of these significant economic players.
No Pause in Sight
Market players have been speculating whether the ECB will conclude its rate-hiking cycle when its deposit rate reaches 3.75 or 4%. Given the technical recession in the 20-member area in the first quarter of this year, this question gains prominence. However, ECB officials have indicated that controlling inflation is more critical than avoiding an economic slowdown.
Against this uncertain scenario, betting on some Europe ETFs, braving the series of rate hikes and high inflation, could be an intriguing idea. Some of these ETFs have lower P/E than the S&P 500-based ETF SPY (i.e., 17.86X).
ETFs in Focus
ProShares MSCI Europe Dividend Growers ETF (EUDV - Free Report) ) – Up 13.9% YTD; P/E: 19.83X
WisdomTree Europe Quality Dividend Growth Fund (EUDG - Free Report) ) – Up 12.5% YTD; P/E: 15.66X
iShares MSCI Eurozone ETF (EZU - Free Report) ) – Up 13.2% YTD; P/E: 13.23X
iShares Europe ETF (IEV - Free Report) ) – Up 13.3% YTD; P/E: 13.67X
iShares MSCI Germany ETF (EWG - Free Report) ) – Up 18.6% YTD; P/E: 12.93X