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An unexpected fall in U.K. inflation levels led investors to increase their bets that the Bank of England (BOE) might keep its interest rate unchanged. According to Reuters, official data revealed that inflation in the country fell by 0.1% in August from July’s 6.8%. August’s inflation data came as a surprise, defying the predictions of both economists surveyed by Reuters and the Bank of England, which had anticipated an increase from July.
More Into Inflation Data
Offsetting a surge in global oil prices, the deceleration in inflation was driven by a decline in volatile hotel and air fares,as well as a slower increase in food prices compared to the previous year. Despite the fall in inflation, British inflation remains be elevated compared to other Western European countries, only behind Austria and Iceland.
Per the Reuters article, the data released on Wednesday revealed an unexpected and significant decline in core inflation, which excludes volatile food and energy prices, dropping from 6.9% in July to 6.2%. The inflation in the service sector, closely monitored by the BOE, also moderated, slowing from 7.4% in July to 6.8%.
Future Path of Rate Hike
Despite growing signs of a slowdown in the British economy, investors had been heavily expecting another interest rate hike by the Bank of England on Thursday, which would have raised the rate from 5.25% to 5.5%.
Prior to the release of the recent unexpected decline in inflation data, investors were estimating a 25% likelihood that the BOE might leave interest rates unchanged.However, the probability of the BOE raising interest rates now appears less certain, as investors have increased the likelihood of a pause to 45%.
According to Michael Metcalfe, head of macro strategy at State Street Global Markets, if the BOE does decide to go with a hike, it is likely that their message will convey an intention to maintain this level for an extended period, as quoted on Reuters.
ETFs in Focus
UK's export-oriented FTSE 100 benchmark added about 0.6% after the surprise inflation data, during opening hours on Sep 20. Despite the falling inflation levels, U.K.’s inflation levels remain the highest among the leading economies in 2023, according to OECD, as per Reuters, causing uncertainty surrounding the economy.
Below, we highlight a few UK ETFs that could be affected.
iShares MSCI United Kingdom ETF seeks to track the MSCI United Kingdom Index with an asset base of $2.71 billion and 84 securities in its basket. The fund charges an annual fee of 0.50%.
iShares MSCI United Kingdom ETF has a major allocation in consumer staples (18.43%), financials (18.18%) and energy sectors (14%). Having a Zacks ETF Rank #3 (Hold) and a Medium risk outlook, the fund gained 0.25% pre-market hours (as of Sep 20).
Franklin FTSE United Kingdom ETF seeks to track the FTSE UK RIC Capped Index. The fund has gathered an asset base of $600.73 million and has a basket of 110 securities. Financials, consumer staples and energy sectors take the top spot with a share of 17.86%, 17.56% and 13.11%, respectively. FLGB charges an annual fee of 0.09%.
Franklin FTSE United Kingdom ETF has a Zacks ETF Rank #3 and has earned 8.86% year to date and 2.70% over the past month (as of Sep 20).
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
iShares MSCI United Kingdom Small-Cap ETF seeks to track MSCI United Kingdom Small Cap Index with an asset base of $43.78 million and a basket of 249 securities. Industrials, consumer discretionary and financials take the top spots with a share of 21.34%, 17.47% and 16.84%, respectively. The fund charges an annual fee of 0.59%.
iShares MSCI United Kingdom Small-Cap ETF has a Zacks ETF Rank #3 with a Medium risk outlook. The fund has generated 3.80% year to date but lost 0.92% over the past month (as of Sep 20).
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
First Trust United Kingdom AlphaDEX Fund seeks to track the NASDAQ AlphaDEX United Kingdom Index with an asset base of $23.88 million and a basket of 76 securities. The fund charges an annual fee of 0.80%. Consumer discretionary, industrials and materials take the top spot with a share of 20.03%, 18.15% and 14.81%, respectively.
First Trust United Kingdom AlphaDEX Fund has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook. The fund has gained 8.69% year to date and 2.11% over the past month (as of Sep 20).
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Falling UK Inflation Puts ETFs in Focus
An unexpected fall in U.K. inflation levels led investors to increase their bets that the Bank of England (BOE) might keep its interest rate unchanged. According to Reuters, official data revealed that inflation in the country fell by 0.1% in August from July’s 6.8%. August’s inflation data came as a surprise, defying the predictions of both economists surveyed by Reuters and the Bank of England, which had anticipated an increase from July.
More Into Inflation Data
Offsetting a surge in global oil prices, the deceleration in inflation was driven by a decline in volatile hotel and air fares,as well as a slower increase in food prices compared to the previous year. Despite the fall in inflation, British inflation remains be elevated compared to other Western European countries, only behind Austria and Iceland.
Per the Reuters article, the data released on Wednesday revealed an unexpected and significant decline in core inflation, which excludes volatile food and energy prices, dropping from 6.9% in July to 6.2%. The inflation in the service sector, closely monitored by the BOE, also moderated, slowing from 7.4% in July to 6.8%.
Future Path of Rate Hike
Despite growing signs of a slowdown in the British economy, investors had been heavily expecting another interest rate hike by the Bank of England on Thursday, which would have raised the rate from 5.25% to 5.5%.
Prior to the release of the recent unexpected decline in inflation data, investors were estimating a 25% likelihood that the BOE might leave interest rates unchanged.However, the probability of the BOE raising interest rates now appears less certain, as investors have increased the likelihood of a pause to 45%.
According to Michael Metcalfe, head of macro strategy at State Street Global Markets, if the BOE does decide to go with a hike, it is likely that their message will convey an intention to maintain this level for an extended period, as quoted on Reuters.
ETFs in Focus
UK's export-oriented FTSE 100 benchmark added about 0.6% after the surprise inflation data, during opening hours on Sep 20. Despite the falling inflation levels, U.K.’s inflation levels remain the highest among the leading economies in 2023, according to OECD, as per Reuters, causing uncertainty surrounding the economy.
Below, we highlight a few UK ETFs that could be affected.
iShares MSCI United Kingdom ETF (EWU - Free Report)
iShares MSCI United Kingdom ETF seeks to track the MSCI United Kingdom Index with an asset base of $2.71 billion and 84 securities in its basket. The fund charges an annual fee of 0.50%.
iShares MSCI United Kingdom ETF has a major allocation in consumer staples (18.43%), financials (18.18%) and energy sectors (14%). Having a Zacks ETF Rank #3 (Hold) and a Medium risk outlook, the fund gained 0.25% pre-market hours (as of Sep 20).
Franklin FTSE United Kingdom ETF (FLGB - Free Report)
Franklin FTSE United Kingdom ETF seeks to track the FTSE UK RIC Capped Index. The fund has gathered an asset base of $600.73 million and has a basket of 110 securities. Financials, consumer staples and energy sectors take the top spot with a share of 17.86%, 17.56% and 13.11%, respectively. FLGB charges an annual fee of 0.09%.
Franklin FTSE United Kingdom ETF has a Zacks ETF Rank #3 and has earned 8.86% year to date and 2.70% over the past month (as of Sep 20).
iShares MSCI United Kingdom Small-Cap ETF (EWUS - Free Report)
iShares MSCI United Kingdom Small-Cap ETF seeks to track MSCI United Kingdom Small Cap Index with an asset base of $43.78 million and a basket of 249 securities. Industrials, consumer discretionary and financials take the top spots with a share of 21.34%, 17.47% and 16.84%, respectively. The fund charges an annual fee of 0.59%.
iShares MSCI United Kingdom Small-Cap ETF has a Zacks ETF Rank #3 with a Medium risk outlook. The fund has generated 3.80% year to date but lost 0.92% over the past month (as of Sep 20).
First Trust United Kingdom AlphaDEX Fund (FKU - Free Report)
First Trust United Kingdom AlphaDEX Fund seeks to track the NASDAQ AlphaDEX United Kingdom Index with an asset base of $23.88 million and a basket of 76 securities. The fund charges an annual fee of 0.80%. Consumer discretionary, industrials and materials take the top spot with a share of 20.03%, 18.15% and 14.81%, respectively.
First Trust United Kingdom AlphaDEX Fund has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook. The fund has gained 8.69% year to date and 2.11% over the past month (as of Sep 20).